With the upcoming May consumer price index (CPI) likely to show a pickup in headline inflation, everyone is considering the possibility of a severe U.S. recession. Recently, Bernstein software analyst Mark Moerdler (Mark Moerdler) said that in this case, investors need to evaluate which companies are better suited to deal with this negative economic situation. “We have seen a significant increase in inquiries from customers wondering what will happen to the software/cloud segment in a recession,” he wrote. “We believe that the quality of [enterprise business] will shine, and those with higher enterprise revenue streams Companies with exposure, deep moats around their businesses, and strong or at least improved margins are likely to do better.” The good news is that investors now have an opportunity to buy software stocks at bargain prices. Software stocks have fallen along with the broader market this year, with the iShares Expanded Tech-Software Sector (IGV), which tracks the performance of the widely followed software industry index, down 25% this year, compared with a 13% decline in the S&P 500.
Here are three software stocks that Modeller believes will outperform the broader market:
“Microsoft has a very broad range of revenue streams and organizations and consumers of all shapes and sizes,” he wrote. “Overall, we think the company is doing well.” The analyst said the software giant’s cloud computing division is linked to smaller startups and consumers that are vulnerable to (downward economics) compared to its main rivals. also have less contact with Internet customers. He has a $365 price target on Microsoft stock. On June 9, the US stock market closed, and Microsoft’s stock price was $264.79. Last week, Microsoft slightly lowered its financial guidance for the second quarter of this year due to the negative impact of foreign exchange fluctuations. However, at a time when many other tech companies have highlighted more difficult macroeconomic conditions, the small downward revision to Microsoft’s financial forecast could indicate that the company’s business is more resilient than its peers.
“Oracle has historically been one of the safest stocks in the software space,” Modeller wrote. “For safety and some profit growth, Oracle is probably our best bet in the software/cloud space during a recession.” He noted that Oracle’s database needs to run the necessary business transaction data for large companies, which means it’s more affordable than other options. Discretionary software purchases are harder to cut. He has a $102 price target on Oracle stock, which closed at $69.22 on June 9.
“While Adobe’s solutions are indeed used by advertisers, their clients are primarily large enterprise companies,” Modeller wrote. “Adobe doesn’t charge for its Experience Cloud based on ad volume, so outside of a very severe downturn, the business may be relatively immune.” The analyst also said Adobe’s creative professional clients rely on the software to generate revenue , and therefore less likely to cancel the subscription. He has a $600 price target on Adobe stock, which closed at $426.42 on June 9.
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