Here Are BofA's 6 Favorite Cloud Software Stocks - Barron's

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BofA sees a “large” opportunity for Splunk in the growing observability market.

Tiffany Hagler-Geard/Bloomberg

Cloud-based software stocks got a vote of confidence Thursday from BofA Securities analyst Bradley Sills, who launched coverage on a slew of companies in the group, laying out a bull case for many of them.

Sills, who had previously been covering small- and mid-cap enterprise software stocks, moves up a notch and adds large-cap names to the mix. His top picks include Coupa Software (COUP), Salesforce.com (CRM), HubSpot (HUBS), Splunk (SPLK), ServiceNow (NOW), and Workday (WDAY).

In a lengthy research note, Sills lays out what he calls his “4M framework” for evaluating software companies—market opportunity, moat, margin, and management.

He asserts that the value of a software company is based on a combination of the size of the addressable market, the defensibility of the company’s competitive position, the company’s customer economics, and the “strength and vision” of management. He sees the overall software addressable market as $957 billion in 2020, or about 1% of worldwide gross domestic product.

Here’s his basic view on his top picks:

• Coupa, price target $400: Sills writes that the company has “best in class customer economics and early traction in underpenetrated B2B payments.”
• Salesforce, target $275: “A long runway still exists for 17%-plus organic revenue growth, led by front office digital transformation in the enterprise.”
• HubSpot, target $600. Sills sees “sustained 25%-plus long term growth” led by consolidation of the “vast” small and medium business front-office applications market.
• ServiceNow, target $650. Sills sees a “long runway for 25%-plus revenue growth driven by employee workflow automation efforts.”
• Splunk, target $180: Sills sees a “large” opportunity in the growing observability market.
• Workday, target $300: The analyst says the company is “well-positioned” to consolidate the large enterprise back-office applications market with a leading cloud platform.

Sills also has Buy ratings on Adobe (ADBE), DocuSign (DOCU), Intuit (INTU), Microsoft (MSFT), and Veeva Systems (VEEV). He has Neutral ratings on Oracle (ORCL) and VMware (VMW), and he rates Shopify (SHOP) as Underperform, citing “lackluster customer economics.”

All six of Sills’ top picks are trading higher on Thursday.

Write to Eric J. Savitz at eric.savitz@barrons.com

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