Salesforce Inc. shares are getting a lot of love on Wall Street, with 43 of 49 coverage analysts tracked by FactSet rating the stock as equivalent to a buy.
But Guggenheim analyst John DiFucci largely bucked the trend, beginning to cover the software giant for sale. The initiation was one of four bearish calls he made on major software stocks, along with Snowflake Inc. SNOW,
Workday Inc. WDAY,
and Okta Inc. OKTA,
also get negative nods.
DiFucci is the only analyst tracked by FactSet to evaluate each of Salesforce CRM,
Workday and Okta for sale.
“We have launched software sector coverage with a cautious bias due to near-term macro weakness that is likely to persist longer than most investors anticipate – and yes, even software is sensitive to macro forces. “, DiFucci wrote in a note distributed to clients late Thursday, while acknowledging that he also appreciates the “long-term potential” of many stocks in the sector.
As for Salesforce, DiFucci said the company “exemplifies the attractive features of the software model, in which revenue growth benefits from a massive renewal base,” but he still has concerns about the company.
Salesforce’s new annualized contract value “is probably lower than most think,” he continued, adding that the software maker is “spending a lot more to capture new business” compared to its peers. This trend is reflected in Salesforce’s operating margins, which are about 10 percentage points lower than a mid-sized, large-cap peer, according to DiFucci.
“We estimate op. the margin could increase more than investors expected, but it is canceled out by the persistent pursuit of inorganic growth by CRM which translates into negative results [free-cash flow] margins after taking M&A into account [merges and acquisitions],” he wrote. “We are skeptical of management’s ability to drive effective organic growth (even at lower rates) – this diminishes the intrinsic value we attribute to recurring CRM resources. [revenue] flow.”
He titled his note to clients “Scrutinizing the Prodigal Son” and set a price target of $150 for the stock, which closed Thursday at $186.73.
On Snowflake, DiFucci worries about how the company would fare in the event of a downturn. He expects the company’s revenue forecast for fiscal year 2023 to be achievable regardless of the economic troubles, though he doubts just hitting that target “is enough to keep the stock market going.” the action”.
“In the face of a recession, which we believe SNOW saw the debut of in its first quarter 23 results – similar to most other non-security enterprise software vendors, by our estimates – the new business momentum of Snowflake could be significantly affected,” he wrote, while setting a price target of $125. Snowflake stock ended Thursday’s session at $167.88.
See also: Snowflake stock falls after downgrade analyst calls ‘tough call’
DiFucci is less optimistic about Workday’s ability to meet its fiscal 2023 revenue outlook, writing that the company faces a “high hurdle” as it pursues 25% growth in contract value annualized he thinks the company will need to meet his revenue forecast.
“We see targets for sustainable subscription revenue growth of more than 20% and $10 billion in total revenue by FY26 at risk as well,” he wrote, adding that ‘he doesn’t think Workday “will remain a high organic growth company (defined as 20% growth in the foreseeable future) even 1-2 years from now.
He set a price target of $134 on Workday shares, which ended Thursday at $166.08.
On Okta, DiFucci sees plenty of “underappreciated opportunities” the company could exploit, although he predicts “a few tough quarters in the near term.”
“Our estimates of future market opportunity imply that it will take some time for this large potential addressable market to become feasible, while Okta is opening up identity markets to segments of enterprise demand that previously did not have access to such solutions or did not have the level of sophistication (e.g. expertise, financing, etc.) .) required to consume them,” he wrote. “Furthermore, we believe execution is critical for Okta as it seeks to enter multiple markets, including some to which it currently has little or no exposure.”
DiFucci has a price target of $89 on shares of Okta, which closed Thursday at $102.49.
He took a relatively more bullish view of other software stocks, initiating coverage of Microsoft Corp. MSFT,
Cloudflare Inc.NET,
and ServiceNow Inc. NOW,
neutral, while launching CrowdStrike Holdings Inc. CRWD coverage,
Oracle Corp. ORCL,
Palo Alto Networks Inc. PANW,
Progress Software Corp. PRGS,
Smartsheet Inc. SMAR,
Splunk Inc. SPLK,
and Zscaler Inc. ZS,
purchase.
Read: Why Microsoft’s earnings forecast is trickier than it looks
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