By Sam Boughedda
Macquarie Research initiated coverage on several software stocks in a note on Wednesday, telling investors it is "still the best house on the block."
The firm revealed that its top pick is ServiceNow (NYSE:NOW), while it has Outperform ratings on nCino (NASDAQ:NCNO), HubSpot (NYSE:HUBS), and most controversially, Salesforce (NYSE:CRM). Meanwhile, its top pick in cyber is CrowdStrike Holdings Inc. (NASDAQ:CRWD), and they remain largely neutral in infrastructure "due to ongoing tightening of IT budget."
"We take what we think is a more constructive view to application software than the Street, as we think we are facing less significant downside than in prior months as the business models of software companies remain superior to most with recurring revenues, robust balance sheets, and no end to the need for digital transformation, automation, data integrity and a single source of data truth. Our biggest concern is margin compression due to return to work/in-person and travel costs, but also due to inflation and power price surges. With macro pressures on growth, OpEx execution is top of mind and where we think companies can be the most rewarded, which is reflected in our ratings," explained Macquarie.
The firm believes that the software sector has contracted materially in terms of the leading valuation metric used by investors.
However, while they see there is "clearly still some potential downside," the firm thinks it is more "limited today due to the health of the balance sheets of software companies, which are rich with cash, as well as the group’s having increased its mix of recurring revenues from 74% to 86% (per IDC) in the past five years, creating more defensible business models."