Enterprise Software: Credit Suisse Sees Microsoft Upside to $35

Jason Maynard, the software analyst at Credit Suisse, today rearranged his ratings on enterprise software stocks, raising his rating on Microsoft (MSFT) to Outperform from Neutral, while cutting Novell (NOVL) to Underperform from Neutral, and dropping Kenexa (KNXA) and Right Now (RNOW) to Neutral from Outperform.

“As we approach the seasonally weak period for IT spending, we are recommending that investors rebalance their portfolios to a higher percentage of lower-beta software names and reduce exposure from some of the faster growing, but more volatile, small and mid cap stocks,” Maynard wrote this morning. And part of the call is upgrading Microsoft, raising his target price on the stock to $35 from $29. “IWe think the stock can
appreciate nearly 20% from current levels given increased confidence in our earnings estimates, strengthening market position in digital entertainment, and the potential for revenue upside as enterprise customers focus on productivity enabling software.”

Maynard notes that he has not been positive on the software giant over the last few years, based on concerns over their transition away from a desktop-centric market. So what’s changed? “This upgrade isn’t a call on Vista or Zune, nor do we think they are out of the woods as software as a service takes hold. Rather, we see a combination of different factors coming together to create an opportunity for the stock to break-out. In addition to our more defensive sector stance, we think the company has embedded conservatism into their guidance. We are incrementally more upbeat about the revenue upside opportunities in both the Server & Business divisions and the path to profitability in the Entertainment group.”

Maynard raised his fiscal 2008 revenue estimate to $56.17 billion from $54.98 billion; EPS goes to $1.68 from $1.62.

Here are excerpts from Maynard’s notes on his trio of downgrades:

• Novell: Shares of Novell have traded up sharply after the recent partnership announcement with Microsoft. Although the new relationship with Microsoft will include a net payment to Novell of approximately $308 [million], we view this as more of a one-time event, and we do not believe the 10% appreciation in the stock is sustainable…Rather than provide a growth engine for the company, we think Novell’s Linux patent deal with Microsoft will hurt the company’s standing in the open source community. We don’t see Microsoft providing a sustainable lift to Novell’s distribution woes. With Oracle entering the market, we doubt there will be enough room to support needed Linux market share gains. Finally, Novell’s legacy Netware business continues to decline, and the level at which revenue can be sustained is unknown.
• Kenexa: The stock has run up substantially from the low 20’s range in August and at current levels, we believe the stock is only modestly undervalued. While we believe there is long term growth potential, we do not believe the stock is likely to continue appreciating at its current rate over the next 6 months…Lowering target price to $37 (from $42).
• Right Now: RightNow is going through a number of business transitions at this time. Last month, the company replaced its head of sales and field operations after the prior officer left for a CEO position elsewhere. In addition, the newest version of its product suite, RightNow 8 (formerly called Castle) is going to be delayed by 1 quarter. Finally, beginning in 2007 management is going to change the company’s licensing strategy in order to emphasize predictable revenue and earnings…In our experience, transitions like these often cause some disruption, near-term or otherwise, to operations. While we acknowledge that RightNow’s management team may indeed steer the company through this transition without disrupting operations, we would rather take a more conservative stance on the name while the issue remains in doubt and we enter the seasonally weak IT spending period…Lowering price target to $18 (from $25.)