- June 10, 2021
- Posted by: Stratford Team
- Category: Markets
- Software stocks have pulled back in recent months as vaccinations have increased.
- Investors should see this as a buying opportunity for some names, analyst Pat Walraven says.
- Walraven shared 4 beaten-down names in the space where investors can take advantage of upside.
- See more stories on Insider’s business page.
Software stocks were among the greatest beneficiaries of the pandemic, as firms relied on remote-work and e-commerce infrastructure to keep their businesses running smoothly in a stay-at-home environment.
But over the last several months, as vaccinations have increased and the economy has gradually reopened, investors have exited much of the sector in favor of cheaper, more cyclical names.
According to Pat Walravens, this has created a buying opportunity in some software stocks. Walravens is an analyst at JMP Securities who has almost 20 years of experience in the business and ranked second in the 2017 Thomson Reuters Analysts Awards for stock picking in the internet and software sub-sectors.
On Monday, Walravens revealed his five favorite firms in the sector whose prices have dropped in recent months but which still have strong fundamental tailwinds.
The five stocks are listed below, along with the reasons why Walravens like them, his price targets for each stock, and their potential upside from current levels.
Price Target: $510
Upside to PT: 60%
Walravens’ Commentary: “Communications is a third of the global IT budget, and Twilio is basically disrupting that communications market with a cloud solution that makes it easier for developers to build different kinds of voice messaging and other communications technologies into the app.”
Price Target: $300
Upside to PT: 20%
Walravens’ Commentary: “Snowflake is disrupting a very large market. Software as a whole is about a $530 billion market, and it’s broken up into 18 smaller markets. The largest one of those is customer experience and relationship management…But the second biggest one is database management systems, and that’s a $65 billion market. And somewhat shockingly, database [management] is the fastest growing of those 18 different markets. And the reason for that is because the last real big wave of innovation in databases was 25-30 years ago.”
“There’s a new wave of innovation happening in the database space and the leader in that effort to modernize the database market, take it to the cloud, and disrupt existing ways of doing things is Snowflake.”
“Snowflake also has a really superb management team who has worked together three times in the past. Their most recent success was at ServiceNow.”
Price Target: $296
Upside to PT: 32%
Walravens’ Commentary: “One of the things that makes Workday so interesting is that they really did not benefit during the pandemic and so they’re bouncing back now. Every software company tried to give you a narrative as for why they should benefit from the pandemic, and some obviously did like Zoom and Docusign, but others really didn’t. And so interestingly, where we are now is you want to own the ones that really didn’t.”
“You have a CEO who has done it before. … A long time ago he was executive at a company called PeopleSoft. It was a really, really good at HR software, and it was acquired by Oracle in a hostile takeover, and in the end Peoplesoft brand and software really got lost within Oracle, and so Neil and his old boss decided to start all over again and do it in the cloud, and they decided to start Workday, which is now a pure cloud and HR software vendor.”
Price Target: $167
Upside to PT: 163%
Walravens’ Commentary: “[Their CEO] looks at companies — originally in utilities, then in oil and gas, then in financial services, now in government — and he looks for people that have a problem, where the damage from that problem is being measured in the hundreds of millions or billions of dollars. And then he uses artificial intelligence to help solve those problems. That is almost the opposite approach that, for example, Salesforce took with something called Einstein.”
Walravens cited C3.ai’s clients — which include the US Air Force and oil company Shell — as signs of the firm’s strong future prospects. He also said that the unique nature and scale of the problems C3.ai helps solve are often only possible through artificial intelligence.