• Tech stocks had a rough start to 2022, as many names continued with the trend that started last year when softwareunderperformed the S&P 500(SP500)by 15%.
• Earnings multiples contracted by 10% in 2021 and are likely to do so again this year, as "digital digestion" happens, according to Jefferies analyst Brent Thill. The downward moves come after a record 80% expansion in 2020 and a healthy 37% growth in 2019, with as much as 80% of software companies expected to decelerate this year after two years of sharp growth.
• Nonetheless, the last time the software sector, as measured by the iShares Expanded Tech-Software Sector ETF(BATS:IGV), underperformed two straight years was in 2005 and 2006, and Thill believes it's likely to happen again this year, as he and other Jefferies' analysts made 11 software-focused predictions for the new calendar year.
• Microsoft
• Microsoft(NASDAQ:MSFT), which had a banner 2020 and 2021, and approaches a $3 trillion market cap led by strength in its cloud and enterprise businesses, is likely to see further gains in 2022, the analysts at Jefferies believe.
• "[The] stock grinds higher to [a] $400 [a share price target] in 2022 after flying to a massive 39% outperformance versus IGV in 2021," Thill wrote in the note. "We continue to see the potential within [Microsoft] as valuation provides downside protection, however rev. deceleration is likely after a phenomenal 22% [year-over-year revenue] growth" in the first quarter of 2022.
• Adobe
• Much has been made about the metaverse and what stocks investors should invest in. But Jefferies believes it's Adobe(NASDAQ:ADBE)that may be the best software bet for the merging of the digital and real world.
• "Its creative tools will enable the next generation of the internet," Jefferies wrote in the note.
• Salesforce
• Salesforce(NYSE:CRM)has transitioned itself over the years, making a number of high-profile acquisitions under co-CEO Marc Benioff, including Tableau, MuleSoft and Demandware.
• However, Thill predicts that Slack, which Salesforce (CRM) acquired for $27.7 billion in December 2020, will provide the most help to the company in 2022.
• "[Salesforce] climbs higher powered by Slack as the center of Customer 360," the analyst wrote. "Fundamental demand remains robust. We believe CRM will return to M&A in the second half as it broadens out the platform (collaboration or planning). Margins will grind higher to 20% with more room to the upside."
• Intuit(NASDAQ:INTU)
• Known for Quickbooks and TurboTax, Intuit (INTU) has shown impressive shareholder returns over the past 15 years. Thill believes that's likely to happen again in 2022, as the company's pending MailChimp acquisition"opens up front office opportunity."
• Crowdstrike Holdings
• Cybersecurity firm Crowdstrike Holdings(NASDAQ:CRWD)is likely to emerge from a crowded market in 2022, Thill suggests, becoming "much more" as it spreads out in different directions. It is also likely to "benefit from robust fundamentals as security spend climbs as a [percentage] of IT."
• Palo Alto Networks
• Palo Alto Networks(NASDAQ:PANW)is likely to benefit as it is a "balanced the rule of 40 story," Thill suggests.
• The rule of 40 is a metric used by investors used to measure software-as-a-service companies. It says a SaaS company's growth rate when added to its free cash flow rate should be 40% or higher.
• Palo Alto Networks (PANW) has a "reasonable" multiple, trading at seven times 2023 revenues, and its strong management team helps provide downside protection, the analyst added, as it "remains a top value pick.
• Cloudflare
• Cloudflare(NYSE:NET)could emerge as the fourth cloud, behind Amazon's(NASDAQ:AMZN)Web Services, Microsoft (MSFT) Azure and Google's(NASDAQ:GOOGL)Cloud Platform, as it is "the most disruptive name" Jefferies covers. But with the stock trading at 30 times 2023 revenue estimates, a better entry point could emerge down the line.
• Work from anywhere
• With the pandemic upending how work is done and where it gets done, Thill and the other Jefferies analysts believe the work-from-anywhere theme that emerged in the early days of the pandemic are likely to persist, leading to a hybrid work week. Thill suggests that investors should own a "basket" of collaboration stocks like Smartsheet(NYSE:SMAR)and Dropbox(NASDAQ:DBX), as earnings multiples continue to decline and there is likely some digestion of gains made in 2021, but the longer-term demand is sustainable.
• Construction spending
• Construction spending is likely to rebound in 2022, which should help Procore Technologies(NYSE:PCOR)outperform the "modest" estimates Wall Street believes it will achieve in 2022.
• Back office growth
• Back-office apps are likely to continue gaining traction in 2022, as the digital transformation continues, and Workday(NASDAQ:WDAY)is likely to see an acceleration in its top-line, as it benefits from this trend.
• Datadog
• Datadog(NASDAQ:DDOG)is seen as one of the "best growth stories in 2022," as Jefferies believes it has a "long runway for growth backed by a large cross-sell opportunity and public cloud migration trends."
• They raised the price target to $230 a share on the stock, which is about 75% higher than its current trading level.
• Microsoft (MSFT) was recently named as a tech stock to buy amid the current market sell-off.