Enterprise software is defining business.
KeyBanc equity analyst Michael Turits recently initiated coverage of the enterprise software industry. Turits says software has become so important in today’s economy that most businesses are now defined by their software. There are three primary secular growth themes within enterprise software that he says are driving stock market outperformance: the digital transformation of existing businesses, data storage/analytics and increasingly important and complex cybersecurity. There are some excellent buying opportunities in stocks capitalizing on those three themes, Turits says. Here are KeyBanc’s top nine enterprise software stocks to buy.
Salesforce.com (ticker: CRM)
Salesforce.com was a pioneer in customer relationship management software as a service, or SaaS. Turits says the stock should be a core holding in any growth-oriented software portfolio. The company has a 20% market share of “front office” applications, the largest category of software applications. In the third quarter, Salesforce reported 20% revenue growth, which is extremely impressive for a company generating more than $17 billion in annual sales. The company is not satisfied, however, recently announcing a $27.7 billion deal to acquire messaging software developer Slack Technologies (WORK). KeyBanc has an “overweight” rating and $310 price target for CRM stock.
HubSpot provides a cloud-based marketing and sales software platform geared toward small and medium-sized businesses. Turits says customer relationship management and front office applications are among the fastest-growing application segments. HubSpot reported 31.5% revenue growth in the third quarter, and Turits is projecting revenue growth will continue to stay more than 25% given opportunities to cross-sell products, expand internationally and target enterprise customers. Turits is projecting 24% compound annual growth in subscription revenue from 2019 to 2023 and says margins will hit 10.3% within three years. KeyBanc has an “overweight” rating and $445 price target for HUBS stock.
Microsoft Corp. (MSFT)
Turits says CEO Satya Nadella has successfully transformed Microsoft from a dominant player in PC operating systems and productivity tools to a market leader in hyperscale cloud computing and SaaS. Microsoft’s market cap has grown to $1.66 trillion, but Turits is still projecting 11% compound annual revenue growth over the next three years. Microsoft reported 48% Azure public cloud revenue growth last quarter. Cloud services competition is limited at Microsoft’s scale, and Turits says the company has an opportunity to expand margins via upselling and bundling. KeyBanc has an “overweight” rating and $250 price target for MSFT stock.
ServiceNow develops and sells software designed to help automate information technology department functions, such as help desks and operations management. Turits says enterprises are adopting ServiceNow as their central workflow platform, a trend that will help the company grow revenue in the mid-20% range in coming years. He is bullish on the company’s operating leverage, especially its 25% earnings before interest and taxes margins. Turits is projecting 31% annual free cash flow growth through 2023 and says the company’s total addressable market will be worth $151 billion by 2024. KeyBanc has an “overweight” rating and $620 price target for NOW stock.
Oracle Corp. (ORCL)
Oracle develops and markets database, middleware and application software and hardware. Turits says Oracle is the top relational database running many of the world’s mission-critical enterprise transactional and analytic applications. Oracle’s revenue growth was just 2% in the fiscal second quarter, but Turits says revenue growth could accelerate along with its autonomous database business. Recent deals with Zoom Video Communications (ZM), 8×8 (EGHT) and TikTok suggest the company’s infrastructure-as-a-service business could be a significant growth driver, and aggressive buybacks will help boost earnings per share. KeyBanc has an “overweight” rating and $65 price target for ORCL stock.
Workday is an enterprise capital management and financial solutions SaaS provider. Workday has one of the largest market shares of the human capital management market, a business that represents 80% of the company’s total revenue. It also has a leading 19% market share of the SaaS enterprise resource planning market. Turits says Workday’s growth rates have dropped as the secular shift in the human capital management business to the cloud has matured. However, he says revenue growth could accelerate as companies shift more of their financial business to the cloud. KeyBanc has an “overweight” rating and $251 price target for WDAY stock.
Okta provides cloud-based identity access management services and is one of KeyBanc’s two preferred cloud cybersecurity stocks. Turits says Okta is the leading identity access management vendor, a service that is becoming increasingly necessary in today’s work-from-anywhere environment. He believes identity-based verification will be the “new perimeter” for enterprises, replacing firewall-based security. Okta reported 42% revenue growth in the third quarter and is the fastest-growing major identity access management company. Turits estimates the company’s total addressable market is at least $55 billion and says Okta will likely continue to gain market share. KeyBanc has an “overweight” rating and $282 price target for OKTA stock.
Palo Alto Networks (PANW)
KeyBanc’s other top enterprise security pick is Palo Alto Networks, a pioneer of next-generation firewall protection. Turits says Palo Alto is the most likely company to consolidate the historically fragmented security software market. Palo Alto is also diversifying its business, expanding out of firewall protection and into cloud security and cloud data analytics. Turits expects Palo Alto to smoothly transition from its leadership position in on-premise appliances to a similar position in cloud-delivered services, and its legacy business is still growing in the 7% to 9% range. KeyBanc has an “overweight” rating and $350 price target for PANW stock.
Splunk is KeyBanc’s preferred way to play the boom in cloud data collection, storage and analysis. Turits says migration to more complex, distributed cloud-native application environments will drive demand, and Splunk’s leadership position will increase adoption and support pricing power. Splunk’s transition from licensing to a cloud subscription model has created earnings noise and growth uncertainty in recent years, but Turits is projecting 40% compound annual revenue growth through 2023. Splunk’s pricing is high, but Turits says customer retention rates are impressive and it has no major competitors. KeyBanc has an “overweight” rating and $239 price target for SPLK stock.
Byte into these software stocks:
— Salesforce.com (CRM)
— HubSpot (HUBS)
— Microsoft Corp. (MSFT)
— ServiceNow (NOW)
— Oracle Corp. (ORCL)
— Workday (WDAY)
— Okta (OKTA)
— Palo Alto Networks (PANW)
— Splunk (SPLK)
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