Software firms are poised for a good year.
Tech stocks were red-hot in 2019 and software stocks were no exception. The group is up roughly 40% on the year collectively, and Bank of America analyst Kash Rangan says there is more upside ahead for top software stocks in 2020. Bank of America is projecting 2.8% growth in information technology spending in 2020, up from 1.2% growth in 2019. In addition, Rangan says easing trade risk and stabilizing global economies should serve as tailwinds for software stocks. Here are Bank of America’s top 10 software stocks to buy in 2020.
Adobe (ticker: ADBE)
Rangan says Adobe deserves a premium valuation relative to its peers due to its massive total addressable market and free cash flow opportunities. However, he says the stock has room for upside from current levels even at a significant discount to its large-cap peer group, which trades at an average earnings multiple of 33. While most investors and analysts focus on the next 12 months, Rangan says Adobe has the chance to create value for at least the next five years. Bank of America has a “buy” rating and a $350 price target for ADBE stock.
Salesforce is trading at a 15% discount to its peer group based on Rangan’s 2020 estimated enterprise value-to-revenue ratio. While Salesforce may not put up the type of growth numbers its smaller competitors do, its size creates unique scale advantages within the cloud services industry. Rangan says the combination of organic revenue growth, margin expansion opportunities and acquisition synergies differentiates Salesforce from other software stocks. In addition, Rangan says Salesforce should both grow its market share and expand its addressable market over time. Bank of America has a “buy” rating and $200 price target for CRM stock.
Rangan says the small business ecosystem is strong heading into 2020, and new product launches such as QuickBooks Online Live and QBO Advance could serve as positive catalysts for Intuit shares. Intuit has a track record of successfully upselling services to both free and paid customers, and Rangan says consensus earnings and revenue expectations for 2020 are too low. He also projects double-digit, long-term revenue and earnings growth and says Intuit should double TurboTax live services revenue in fiscal 2020. Bank of America has a “buy” rating and $303 price target for INTU stock.
Twilio shares came back to earth a bit in the second half of 2019 after an impressive 18-month run. Analyst Nikolay Beliov says investors can expect the cloud communications giant to get back on the horse in 2020 and outperform consensus revenue and earnings expectations. Beliov says investors have been overly concerned about potential regulatory headwinds. He estimates Twilio could potentially report more than 36% revenue growth in fiscal 2020, including greater than 13% growth in new business. Bank of America has a “buy” rating and $138 price target for TWLO stock.
Rangan says Splunk has breakthrough technology. The company eased investor concerns last quarter when it reported annual recurring revenue (ARR) was up 53% to $1.439 billion and cloud ARR was up 86% to $368 million. Rangan is projecting more than $2 billion in ARR in 2020 and near $3 billion by fiscal 2022. In the longer term, Rangan says Splunk should reach a free cash flow inflection point and generate $1 billion in positive cash flow in 2023. Bank of America has a “buy” rating and $170 price target for SPLK stock.
RingCentral offers cloud-based business communications systems. Beliov says RingCentral’s partnership with Avaya announced in October is a “game changing” deal, providing RingCentral with instant access to 25% of the unified communication service market. Early checks on the Avaya partnership, which is launching in the first quarter of 2020, revealed positive feedback from vendors. Beliov says partners believe Avaya Cloud Office could eventually reach 50% penetration of existing Avaya customers. Beliov values the Avaya partnership at $70 per RingCentral share. Bank of America has a “buy” rating and $198 price target for RNG stock.
Coupa Software (COUP)
Coupa is a cloud-based business spending management software company. Analyst Brad Sills says 41% organic billings growth last quarter was impressive and early traction in Coupa Pay is encouraging, especially among large customers. Sills says Coupa should continue to grow revenue at around 35% annually, adding to its market share. Also, he says Coupa’s installed base of 988 large- and mid-sized customers, ease of implementation and network of 4 million suppliers – and growing – differentiates it from competitors. Bank of America has a “buy” rating and $185 price target for COUP.
HubSpot provides cloud-based inbound marketing tools. Sills says pricing increases and growth in HubSpot’s core marketing division, plus contributions from sales and service should drive at least 30% annual revenue growth over the next three to five years. Sills says investors can expect the recent 25% increase in sales pro pricing and a refocus on sales execution to increase billings growth to around 35%. Sills is projecting 14% marketing subscription revenue growth in fiscal 2020. Bank of America has a “buy” rating and $190 price target for HUBS stock.
Avalara is a cloud-based provider of tax compliance software. Sills says accelerating customer counts provide evidence of Avalara products’ value and a worldwide increase in tax regulations should help drive demand. Rising average sales price suggests the company will have opportunity to upsell to existing customers over time. Sills says the chief financial officer transition in March 2020 will be a smooth one given incoming CFO Ross Tennenbaum has previously served as head of strategic initiatives for the company. Bank of America has a “buy” rating and $100 price target for AVLR stock.
Workday is a human capital management and financial solutions services provider. Rangan says Workday stock’s underperformance in 2019 was mostly due to its lackluster guidance, but the company’s underlying numbers and its secular growth opportunity remain impressive. Rangan says guidance for revenue growth in the company’s human capital management segment to be in the mid-teens during fiscal 2021 is conservative. In addition, rising attach rates, more platform deals and international expansion could be bullish catalysts. Rangan says Workday can triple its revenue to $11 billion by fiscal 2025. Bank of America has a “buy” rating and $260 price target for WDAY stock.
Top software stocks to buy in 2020:
Adobe (ADBE)Salesforce.com (CRM)Intuit (INTU)Twilio (TWLO)Splunk (SPLK)RingCentral (RNG)Coupa Software (COUP)HubSpot (HUBS)Avalara (AVLR)Workday (WDAY)