Software Looks Soft - Citi, Morgan Stanley

Analysts at both Morgan Stanley and Citigroup this morning engaged in some wholesale bashing of the software sector, cutting estimates, reducing price targets and generally expressing concern that the whole sector is in for further pain in the months ahead.

Citigroup’s Brent Thill asserted in a research note that “although the stocks have taken a massive hit YTD…there is more pain likely over the next 3-6 month.” He advises underweighting the group.

“While valuation multiples have compressed significantly, in many cases below trough levels, the big question mark is where revs and EPS will bottom,” he writes, noting that weak Q4 earnings reports will likely be followed by “much worse than seasonal Q1 results,” which he thinks will trigger further estimate cuts. (I’d note that Thill also engaged in a round of whole sale estimate cutting on October 1.)

He cut estimates and target prices this morning for Blackbaud (BLKB), Citrix (CTXS), Omniture (OMTR) and VMware (VMW). Here’s his list of the troubles the industry faces:

• Lack of Q4 budget flush.
• Seasonal Q1 slowdown.
• Evaporated demand.
• Inventory reduction in the channel.
• Margin risk from channel price protection and unsold inventory.
• FX rate year-over-year comparisons.
• Deteriorating non-U.S. economies.
• Costs structures too bloated for new demand levels.

Morgan Stanley’s Adam Holt likewise today brought down his numbers for software company earnings. Holt is actually more constructive on the stocks than Thill; he says the stocks should outperform the market over the next 12 months. But he does say that consensus estimate will likely move lower as companies announce Q4 results “to hopefully set a level that enables stocks to work.” Hold cut estimates for the companies he follows by 5%-11%; he notes that on average he is now 15% below consensus, and that his estimates are down 22% since August.

Holt cut price targets today on Citrix (CTXS), Intuit (INTU), McAfee (MFE) and Symantec (SYMC); he reduced estimates on those stocks, along with DemandTec (DMAN), Guidance Software (GUID), NetSuite (N), RightNow (RNOW) and SourceFire (FIRE).

Comments

[LukyInVstr:]

Not great advice. Software in general may be soft, but speaking intelligently on the software market, and referring to the market "generally" is "generally", a bad idea.

Sales and Marketing software will encounter a much wider array of problems then that of a gov't mandated piece of security software. Nearly all forensic software providers have hit thier numbers. Look for gov't security software to explode over the next 3 years.

Take into account the Billions (and possibly Trillions) of dollars being used to "bail out" the auto industry. At some level, there will be heavy monitoring on the use of these dollars. And in order to document this digital trial, eDiscovery will work its magic.

Guidance Software (GUID) has strategically placed themselve at the fulcrum of this movement. Look for GUID to sky rocket in 09.

Jan 08 02:43 PM