In conjunction with their 2021 outlook, JPMorgan analysts Sterling Auty and Jackson Ader took the opportunity to rebalance the ratings in their coverage universe, downgrading high multiple names such as Zoom Video (ZM) and Crowdstrike (CRWD) and upgrading cyclically sensitive names like Autodesk (ADSK) and Intuit (INTU).
DOWNGRADING HIGH MULTIPLE NAMES: In their 2021 outlook reported, issued earlier today, JPMorgan analysts Sterling Auty and Jackson Ader pointed out that looking back at 2010, they found that the 20 highest multiple stocks at the end of 2009 underperformed the overall software industry average in 2010. If the current vaccines prove effective in manufacturing rates hitting scale, they believe the economic expansion starting in the June quarter could replicate that same environment from 2010. Additionally, the analysts think the increasing shift of compute to the cloud will likely deemphasize the significant spend seen through the years on firewall upgrade cycles. The large revenue contribution that is still tied to on-premise firewall spend is likely to come under increasing pressure as 2021 unfolds, and that could be a headwind to stock performance, they added.
As such, Auty and Ader downgraded Zoom Video to Neutral from Overweight with an unchanged price target of $450. While the analyst acknowledged that Zoom is "fundamentally changing" how professionals communicate through the use of its video-first collaboration platform, they argued that the revenue multiple fully reflects the upside potential and believe the under 10-employee segment of the user group posed a risk to churn rates as the vaccine allows for more in-person interaction moving forward, which means they expect the shares to perform more in line with their coverage.
The analysts also downgraded Crowdstrike to Neutral from Overweight with an unchanged price target of $175. While Auty and Ader believe the company is the best positioned to capitalize on the consolidation of endpoint with its technology advantage and experienced management team, U.S. economists are forecasting a rebound in growth in 2021 that they think will not provide the same level of outperformance for high multiple stocks based on current valuations. Based on the current valuation, the analysts believe the stock will not provide the same level of outperformance relative to their coverage in 2021.
Additionally, Auty and Ader downgraded DocuSign (DOCU) to Neutral from Overweight with an unchanged price target of $271. The move to electronic signatures is roughly a $25B opportunity, and the analysts believe digital contracting offers the opportunity to build on top of that level. DocuSign is the clear leader in this space by at least a factor of 2-times, they contended. Leading this large and growing space creates significant growth and profit opportunities for DocuSign, but based on the current valuation and the fact that the highest multiple stocks of late 2009 underperformed the entire software industry in 2010, the analysts believe the market is no longer going to provide the same level of outperformance for DocuSign shares in 2021.
The analyst also downgraded Okta (OKTA) to Neutral from Overweight with an unchanged price target of $258. While Okta serves a market that is regarded as the number 1 security priority for enterprises, growth should rebound in 2021 as a vaccine is rolled out, Auty and Ader noted. The 2009-2010 time frame provides a similar period of snapback in growth following a recession, and their analysis shows that the highest valuation software stocks in 2009 underperformed the software industry in 2010. Based on the current valuation, the analysts believe Okta shares will perform in line with their coverage universe.
Citing similar concerns, Auty and Ader downgraded Palo Alto Networks (PANW) to Underweight from Neutral with an unchanged price target of $308. The analysts noted that Palo Alto has made a series of cloud asset acquisitions and built out a solid cloud portfolio. However, sales execution issues around product revenues in the first half of 2020 and a shift to the cloud are leading to continued product revenue declines, they added. When Next Generation Security is large enough to drive growth acceleration is when the analysts think shares can again sustainably perform in line with their coverage or better, but until then the decline in product will put pressure on growth.
The analysts also downgraded Check Point (CHKP) to Underweight from Neutral with a price target of $134, down from $141; Cloudflare (NET) to Neutral from Overweight with an unchanged price target of $83; Fortinet (FTNT) to Underweight from Neutral with an unchanged target of $140; and Veeva (VEEV) to Underweight from Neutral with an unchanged price target of $297.
UPGRADING CYCLICALLY SENSITIVE NAMES: If economic expansion does materialize beginning in the June quarter, Auty and Ader believe stocks like Autodesk and Intuit will be direct beneficiaries. Design names have direct exposure to manufacturing, industrial, and construction, which should be core to expansion. The analysts believe Intuit, Verisign (VRSN), and Wix.com (WIX) have SMB exposure that could benefit from new business creation following the spike of new business applications reported by the Census Bureau.
Auty and Ader double upgraded Autodesk to Overweight from Underweight with a price target of $345, up from $239. With a vaccine improving the macro disruptions seen in fiscal year 2021, the analysts believe it is a good time to step into the cyclical names like Autodesk. Adding to the cyclical upswing is the growing and underpenetrated construction market, which the company sizes at a $13B TAM in fiscal year 2025, and they think the company is positioned well given its longstanding presence in the architecture and building information management spaces, which present strong opportunities for cross and upselling. The stock also offers an attractive valuation compared to its peers, Auty and Ader contended.
The analysts also upgraded Cadence Design Systems (CDNS) to Overweight from Neutral with a price target of $145, up from $122. They pointed out that the electronic design automation software segment should generate roughly mid-single-digit growth for its core tools with the potential for faster growth through ancillary product areas including pre-built design IP. Further, Auty and Ader believe Cadence’s investment into 3D solvers opens up a larger addressable market and believe that a shift toward more cyclically exposed names will further boost growth.
Additionally, they upgraded VeriSign to Overweight from Neutral with an unchanged price target of $246. The analysts noted that VeriSign is one of the most lucrative unit economic franchises in their coverage given its exclusive position for .com registry operations, and it has the highest operating margins in their coverage. The growth in .com / .net has matured, but VeriSign has regained the ability to raise prices, which should allow for sustainable high-single-digit and even low-double-digit top-line revenue growth. That top-line growth, combined with some margin expansion, even at these lofty margin levels, and continued share repurchases should deliver earnings and cash flow growth that exceed the S&P 500 over the course of the business cycle, they added.
Turning bullish on Intuit, Auty and Ader double upgraded the stock to Overweight from Underweight with a price target of $450, up from $300. Fiscal 2020 saw one of the biggest category shifts away from assisted tax prep over to DIY that they can remember, and that directly benefited Intuit, as it remains the dominant number one provider of DIY tax prep solutions, the analysts contended. Additionally, the analyst highlighted that the company was finally able to close the Credit Karma acquisition without very many restrictions. They think this opens up a very large cross-sell opportunity.
The analysts also upgraded Altair (ALTR) to Overweight from Neutral with a price target of $65, up from $50; PTC (PTC) to Overweight from Underweight with a price target of $130, up from $88; and Wix.com to Overweight from Neutral with a price target of $305, up from $292.
PRICE ACTION: In afternoon trading, shares of Zoom have dropped over 6% to $386.97, Crowdstrike's stock has slipped about 8% to $163.34, and DocuSign has slid more than 5% to $222.12. Also lower, Intuit has dropped over 2% to $364.53, and Autodesk and Verisign have slipped a little over 1% to $280.57 and $204.43, respectively.
Zoom Video
-26.23 (-6.37%)
Crowdstrike
-12.77 (-7.20%)
DocuSign
-12.3 (-5.24%)
Okta
-19.23 (-7.66%)
Palo Alto Networks
-10.615 (-3.42%)
Check Point
-2.99 (-2.43%)
Cloudflare
-6.365 (-7.62%)
Fortinet
-6.38 (-4.84%)
VeriSign
-2.96 (-1.43%)
Wix.com
-4.53 (-1.80%)
Cadence Design
-2.48 (-2.09%)
Altair Engineering
-0.36 (-0.65%)
PTC
+0.1 (+0.09%)