Even amid a slowing economy and volatile markets, software stocks should hold up well, Morgan Stanley said Tuesday.
Software sector analyst Keith Weiss shared the firm’s top picks for 2019, which included Microsoft (ticker: MSFT), Salesforce.com (ticker: CRM), and Palo Alto Networks (PANW). The analyst said software earnings tend to be more resilient versus other industries and the sector’s valuation is near its historical averages.
“Demand behind strategic digitalization efforts should prove durable even in a slowing macro environment, supporting growth for well positioned software vendors,” he wrote. “With the recent pullback, we see attractively priced opportunities in strong secular growers.”
iShares Expanded Tech-Software Sector ETF (IGV) has declined more than 11% since the end of September through Monday.
Weiss also noted nearly 80% of software sales on average are now recurring with more than 90% renewal rates.
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“These revenues should remain relatively durable even in volatile markets,” he wrote.
Here are three Overweight-rated software companies that made Morgan Stanley’s top picks list for 2019:
Microsoft
The firm raised its price target for Microsoft stock to $140 from $130, representing about 35% upside to the current level.
The analyst believes Microsoft is the best positioned company in technology as the world moves from on-premise servers to cloud computing and hybrid [cloud and non-cloud] architectures.
Weiss said Microsoft stock’s valuation is attractive at 17 times his estimated 2020 earnings for the company. He predicts the company will benefit from strong growth in its cloud computing business and from its data center customers.
Salesforce.com
The analyst has a $178 price target for Salesforce.com stock, about 20% higher than the current level.
“With a cloud-based platform automating and optimizing all stages of the customer life cycle, Salesforce.com looks best positioned to benefit from these initiatives,” he wrote.
He estimates Salesforce.com’s end-market opportunity is $200 billion.
Palo Alto Networks
The firm has a $266 price target for Palo Alto Networks stock, representing an increase of 35% from the current price.
“With a solution portfolio expanding from the network to endpoints and into the Public Cloud—Palo Alto Networks leads in the race towards a comprehensive Intelligent Security Platform,” Weiss wrote.
The analyst predicts Palo Alto Networks can grow its revenue at more than 20% a year.
Write to Tae Kim at tae.kim@barrons.com