Escalations in the US-China ‘trade war’ led to steep drops in the markets last Friday. The S&P 500 lost 2.4%, and the NASDAQ, with its overrepresentation of China-sensitive tech companies, lost 3%. It was a market rout, and a bad day for investors.
Which is not to say that everyone lost. While tech companies have proved particularly susceptible to the US-China trade disputes, the software sector is proving highly resilient to trade pressures. Their relative strength in the face of those pressures makes sense; software companies don’t have import-export trade exposure that tech hardware companies have, and their higher margins give them room to maneuver around the customer billing exposure that they have to face. Let’s look at three software companies that outperformed in last session’s retreat.
Adobe, Inc. (ADBE)
With a share price of $282, and a PE ratio well above 50, Adobe is an expensive stock – but the expense has proven worthwhile, as ADBE has also grown 178% in the last three years. The company is well known – it created the PDF document, Photoshop, InDesign, Acrobat, Dreamweaver, and Flash, to name just a few of its more ubiquitous products. It’s a profitable company, too, having reported a 4% EPS beat back in June, marking the seventh time in eight quarters that the company had beaten earnings expectations.
So, Adobe is an investor’s dream, there is no doubt about that. It’s also, in today’s market climate, a relatively defensive stock. Where the NASDAQ fell 3% in the last session, ADBE shares only slipped 1.8%, outperforming the index. We’ll get a better picture of just how resilient Adobe is next month. The company is scheduled to report earnings on September 17, and is expected to show an EPS of $1.59, the third straight quarter of earnings growth.
In the meantime, Wall Street’s analysts consistently like what they see in ADBE. Writing back in June, Barclay’s analyst Saket Kalia put a $330 price target and 16% upside on ADBE, saying after the last earnings report, “The two key numbers to imply from the print are $1.55B in fiscal 2019 net new Digital Media annual recurring revenue and ~43% Q4 exit operating margin. While $1.55B is not guidance, we can get there from the Q2 beat, Q3 guide, and Q4 commentary…”
Writing just a few weeks ago, UBS analyst Jennifer Lowe says, “The company can sustain an operating profit and earnings growth of 20% or more. Profit growth should support the current enterprise value to expected 2020 earnings multiple of 31-times. Expect Adobe shares to continue moving higher.” Like Kalia, she puts a $330 price target on Adobe shares.
Overall, ADBE receives a Strong Buy from the analyst consensus, based on 12 buys and 4 holds given in recent months. The stock is expensive, at $282 per share, but the average price target of $318 suggests an upside potential of 12%.
Coupa Software, Inc. (COUP)
California-based Coupa is not was well known as Adobe, but it’s a leader in the field of Business Spend Management. The company’s software products are cloud-based systems designed to make it easy for customers to view and control their business expenditures and invoices in real time.
Coupa’s been growing steadily since early 2018, buoyed by the need its products fill – companies always want to know their bottom line, and they want to know it at a glance. Despite EPS losses, Coupa’s revenues have been strong. And in last week’s market rout, COUP shares lost only 0.9%, outperforming the NASDAQ by a wide margin.
In fact, COUP’s growth has been so strong that the stock is actually showing a downside; share price growth has accelerated past the average price target in recent weeks, and the more recent, higher, analyst targets have not yet caught up. A look at some of those recent analyst reviews tells the story.
5-star analyst Brent Bracelin, of KeyBanc, says that Coupa has potential to “leverage over $400B of annual spend across more than 1,000 customers on the Business Spend Management platform. We estimate the new Coupa Pay digital payment opportunity could grow to $270M by fiscal 2024 from $3.7M in fiscal 2020. Coupa Pay could alone be worth an incremental $35 per share.” Bracelin gives COUP a $171 price target, implying an upside of 22%.
Chiming in more recently, Wedbush’s Steven Koenig says that Coupa has a “large market of business spend management and relatively weak competition creating a long runway for sustained sales growth and margin expansion.” He gives Coupa a $168 price target, for a 20% upside.
Coupa’s analyst consensus rating is a Strong Buy, derived from 9 buys and 3 holds. The stock shows a downside – as described, the share appreciation has accelerated past an obsolete price target. COUP shares are currently selling for $140.
Salesforce.com, Inc. (CRM)
Salesforce is the outlier here – the stock that didn’t just outperform the market during a day’s slump, but actually finished that day in the green. CRM shares gained 2.25% while most of the market was showing losses. While some of that outperformance can be attributed to CRM’s status as a cloud-based software company, most of it is probably attributable to the company’s August 22 quarterly report. CRM simply clobbered the forecasts for fiscal Q2 2020.
Quarterly revenues showed a 22% year-over-year gain, to $4 billion, and beat the estimates by 1.25%. Earnings were even stronger, with the 66 cents reported beating the 47 cents expected by an eye-opening 40%. It was Salesforce’s first quarterly earnings report since purchasing Tableau Software for over $15.3 billion, and it easily allayed investor concerns that the company had bitten off more than it could chew. Even better, company management’s forward guidance on Q3 revenues indicates accelerating growth – the $4.4 billion expected is 31% higher than last year’s Q3.
The earnings results gave CRM a boost in the markets and it’s still rising. CRM also got a run of positive vibes from analysts that are still coming in. Tom Roderick, writing for Stifel, said of the earnings report, “The company once again finds itself sitting atop the throne with its head held high and its crown intact after its revenue, EPS and Current Remaining Performance Obligations beat expectations.” Roderick’s $!95 price target indicates confidence in a 28% upside potential.
Also weighing in on CRM was Canaccord’s Richard Davis, the #1 rated analyst in TipRanks’ database. He said, “…the results were good in every metric that mattered and allayed investor fears of a slowdown. We like the current valuation.” His price target, slightly conservative at $185, still suggests room for a 22% upside to CRM shares.
Like the other stocks in this list, Salesforce has a Strong Buy from the analyst consensus. The consensus is based an impressive 30 buy ratings, and only 1 hold. The average price target, $186, suggests a 22% upside from the current share price of $151.
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