Before the market opened, Morgan Stanley released a research note on the software sector titled "2019 Outlook: In Secular Growth We Trust." In the note, the firm's analysts, including Keith Weiss, Melissa Franchi, Sanjit Singh, and Stan Zlotsky, upgraded and downgraded a number of software stocks. In the note, the analysts wrote "the software sector contains some of the best secular growth stories in Tech and continues to gain share of the enterprise IT wallet." Despite the compelling secular demand drivers and strong business models, the analysts still found names where they believe durable EBIT growth well underprices the broader markets, which they believe represent compelling opportunities.
ATTRACTIVE OPPORTUNITIES: Among the attractive opportunities Morgan Stanley saw were three companies it remained Overweight on -- Salesforce.com (CRM), Microsoft (MSFT), and Palo Alto Networks (PANW).
With a "cloud-based platform automating and optimizing all stages of the customer life cycle," Salesforce.com looks well positioned to benefit, according to Morgan Stanley, and at 21x EV/CY20 free cash flow, shares still do not reflect the durability of growth into Salesforce.com's $200B market opportunity. Morgan Stanley maintained an Overweight rating on Salesforce.com and raised its price target on shares to $178.
As the "IT conversation shifts from pure public cloud towards hybrid cloud architectures involving enterprises utilizing a mix of on-premise and public cloud resources," Microsoft pulls ahead as the best secularly position firm in tech, Morgan Stanley believes. Trading at 17x CY20 price/earnings versus a durable high-teens total return profile, shares still undervalue Microsoft's improved secular positioning. The firm maintained an Overweight rating and raised its price target on shares to $140.
With a "solution portfolio expanding from the network to end-points and into the public cloud," Palo Alto Networks leads in the race towards a comprehensive Intelligent Security Platform, wrote Morgan Stanley. At 10X EV/CY20 free cash flow, Palo Alto trades in-line with no growth legacy software vendors versus the durable 20%+ grower its proving to be. Morgan Stanley maintained an Overweightr rating and $266 price target on Palo Alto shares.
UPGRADES: In the sector note, Morgan Stanley upgraded Akamai (AKAM), New Relic (NEWR), DocuSign (DOCU), and Tenable (TENB), calling them "interesting stories."
Analyst Keith Weiss upgraded Akamai to Overweight from Equal Weight, citing his increased confidence in durable high single digit revenue growth and margins improving. He expects stabilization in Media, continued rapid growth in Security and a "sticky customer base" in Web Performance can all drive durable double-digit operating income growth, which does not look priced in, Weiss stated. However, he trimmed his price target on Akamai shares to $79 from $82.
Analyst Sanjit Singh upgraded New Relic to Overweight from Equal Weight as he sees the company delivering durable top line growth over the next several years. His confidence in the company's ability to sustain growth is due to the emerging application architecture that is becoming the standard across enterprise organizations, Singh said. New Relic's strategic focus on modern application environments gives it a significant head start in the segment of the market that is poised to see the fastest workload growth over the next several years, added Singh, who raised his price target on the stock to $110 from $100.
Analyst Stan Zlotsky upgraded DocuSign to Overweight from Equal Weight following a roughly 35% decline in the shares from their August highs. He continues to see the company having a long-term sustainable runway of profitable growth and views the pullback as presenting an attractive entry point. Zlotsky edged up his price target on DocuSign shares to $53 from $52 as he rolled forward his valuation to his FY21 estimates.
Analyst Melissa Franchi upgraded Tenable Holdings to Overweight and raised her price target for the shares to $31 from $30. The stock is down 17% in the past three months versus security peers being down 3%, which Franchi said she views as overdone. The discount likely reflects some increased debate on the sustainability of top-line outperformance, but Franchi said cited several factors that increase her conviction in revenue upside potential for Tenable, including the fact that vulnerability management is growing as a key technology, Tenable being only 20% penetrated within the asset base of its existing customers and the opportunity to upsell Tenable's low end Nessus base with its enterprise solutions.
DOWNGRADES: In the sector note, Morgan Stanley downgraded VMware (VMW) and Oracle (ORCL), saying "stories which have run their course, are undergoing transitions, or remain a work in progress are likely to underperform."
Analyst Keith Weiss downgraded VMware to Equal Weight from Overweight after its P/E multiple expanded nearly 50% to be in line with peers, which he believes fully reflects the company's recent fundamental outperformance. The company's "Act 2" categories, including vSAN, NSX and EUC, have reached a scale to meaningfully contribute to growth, but now he sees increased risks, including VMware's high exposure to on-premise infrastructure deployments and its mix of perpetual license revenue, Weiss tells investors. He lowered his price target on the stock to $152 from $175, which Weiss noted incorporates the payment of the $26.81 special dividend per share.
Weiss also downgraded Oracle to Equal Weight from Overweight as he does not see the catalysts for a positive inflection in revenue growth coming in 2019. The prospects of a strong database cycle have been pushed further out, added Weiss, who thinks limited operating income growth thru calendar 2019 will not be enough to drive its multiple higher. Based on current multiples applied to his calendar 2020 EPS estimate, Weiss cut his price target for Oracle shares to $53 from $57.
Salesforce
+2.53 (+1.73%)
Microsoft
+2.37 (+2.32%)
Palo Alto Networks
+3.26 (+1.67%)
Akamai
+1.29 (+2.06%)
New Relic
+2.81 (+3.30%)
DocuSign
+0.75 (+1.74%)
Tenable Holdings
+1.82 (+7.90%)
Acquired by AVGO
+0.49 (+0.34%)
Oracle
+0.27 (+0.56%)