Software stocks were a pandemic darling, but their popularity waned as economies reopened. Nevertheless, the tech sub-sector remains a key part of several long-term secular trends, such as cloud computing and artificial intelligence. “We continue to believe in the structural positives of software, specifically, its ability to drive significant return on investment to customers,” Goldman Sachs ‘ analysts, led by Gabriela Borges, wrote in a note on Jan. 3. But it recommended that “long-term investors be selective in finding assets that have the willingness and ability to improve unit economics and margins.” Citi is also sounding a cautious tone on the sector, calling 2023 a “year of dichotomy in software.” Jefferies , for its part, said it believes the first half of the year will be “tough” for the sector. “In lieu of big single-stock calls, our portfolio construction framework favors a macro-scenario-weighted view, where profitable growth “platform” stories with consolidative-incumbency, defensive multiples, expanding [operating margin] scope, buyback horsepower, and low seat-based exposure are places to hide,” Citi’s analysts, led by Fatima Boolani, wrote in a Jan. 15 note. Stock picks CNBC Pro had a look at Wall Street research to find the banks’ top stock picks to play the software sector. Goldman likes Salesforce for its ambition of achieving a 25% operating margin by FY2026. Coupled with management’s commitment to shareholder returns and “long runway for growth,” the bank said it believes Salesforce is likely to reach an “inflection point” that can re-rate the stock higher. The bank said the company’s already “healthy” operating margins could grow about 20%. It added that Workday has a “solid set-up” to improve profitability. It gives the stock a price target of $230. Goldman also likes tax technology software firm Vertex for its potential to “drive higher cloud margins over time.” The bank said it believes the company’s cloud transition story is “underappreciated” by the market. It gives the stock a price target of $21. Oracle is Bernstein’s “number one” pick in the software space heading into a recession. “Oracle meets all of those criteria (large enterprise customer base, enterprise workloads, critical workloads, strong and improving margins), and we believe consensus estimates are too low on both revenue and earnings per share,” analyst Mark Moerdler wrote in a Jan. 18 note. The bank also likes Microsoft , which it said is a “really well managed” and “great company” that will come out stronger from the economic slowdown. Jefferies named ServiceNow one of its top picks for 2023. “We are positive on ServiceNow given our confidence in its ability to sustain this high growth/profitability combo due to ongoing digital transformation among enterprises, its strong sales and operating execution, growth tailwinds from its renewal cycle and emerging products, and available runway in its core IT market,” Jefferies’ analysts, led by Samad Samana, wrote in a Jan. 5 note. The bank also likes HubSpot as a “prime bounce-back candidate” in 2023 and the “next big front-office platform” for small and medium businesses. German software firm SAP is one of Bank of America ‘s top picks in European software. “We see SAP’s service proposition and business model as well suited to a difficult economic environment, with a product offering critical to deliver efficiencies for companies, while the transition to a cloud-based subscription model is largely under way, leaving licenses at only 6.6% of sales in 2023,” analyst Frederic Boulan wrote on Jan. 11. — CNBC’s Michael Bloom contributed to this report
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