Citigroup’s Brent Thill advises underweighting the software sector heading into 2008.
In a research note Monday morning, he said there are two reasons to stay cautious on the sector headed into the new year. One, the potential for a slowdown in the economy and IT spending. And two, poor seasonality for the sector in the January through April time period.
Thill isn’t suggesting abandoning the sector, but he does think being selective will be key. Thill notes that over the last five years, the average return on software stocks in the first four months of the year has been -2.2%.
Thill advises sticking to three kinds of software stocks:
- 1. “Growth stories drive by product cycles or secular trends,” including Microsoft (MSFT), VMware (VMW), Electronics Arts (ERTS) and Activision (ATVI), Adobe (ADBE) and Akamai (AKAM).
- 2. Companies with recession-resistant demand: Intuit (INTU), Oracle (ORCL), Check Point (CHKP).
- 3. Possible M&A targets: BEA Software (BEAS), Tibco (TIBX), Informatica (INFA) and BladeLogic (BLOG).
Thill also offered up a list of 10 predictions for the software sector for 2008, which both illuminates and repeats those themes:
- 1. Software names driven by product cycles and/or secular growth themes outperform those exposed to traditional IT spending.
- 2. Most important product cycle of 2008: MSFT Vista(SP1)/Office2007/Windows Server 2008/SQL.
- 3. Virtualization picks up more steam with enterprises, but primary beneficiary remains VMW rather than MSFT or Citrix (CTXS).
- 4. ORCL Fusion Apps underwhelm, but overall ORCL results are unaffected.
- 5. Video game cycle enters sweet spot with consistent upside to quarterly guidance for the major video game publishers.
- 6. Take Two’s (TTWO) Grand Theft Auto 4 is the top selling video game in 2008.
- 7. CDN pricing firms and video on the web accelerates, leading to revenue upside for AKAM.
- 8. CRM dominates SaaS, but other SaaS vendors like NetSuite emerge with critical mass. Traditional vendors still struggle in SaaS.
- 9. Symantec (SYMC) undertakes a more aggressive cost cutting program and sees VMW emerge as a stronger competitor.
- 10. Top takeout candidates - BEAS, TIBX, INFA, BLOG.