The market for application software is at risk of a recession hitting the tech sector, but there remain core opportunities for companies in areas where corporate spending is seen as remaining resilient in the months ahead.
That's the opinion of analysts at Citi, where analysts recently initiated or reiterated coverage on almost two dozen software companies viewed as showing exceptional "quality" during the current economic environment.
"We favor names that could see increased demand priority, can drive solid ROI [return on investment] with quick payback periods, [and] a proven track record of sales execution," said Citi analyst Steven Enders, in a report on the brokerage's new stance on application software."Additionally, we have a preference in the near term for quality, strong margin profiles and durable growth."
With such a view in mind, Enders said Citi's "favorite opportunities" include buy ratings on the following companies:
- Ceridian HCM Holding (CDAY), which is seeing "mid-market growth" and "enterprise expansion.
- Workiva (WK), due to its stability in core platforms for financial reporting and automation.
- Intuit (NASDAQ:INTU), which is showing resilience due in part to a recent increase in pricing of its QuickBooks accounting products.
- Instructure Holdings (INST), which Enders said was benefitting from being the "best in class" name in educational technology with a stable base of elementary, primary and higher educational customers.
- Box (NYSE:BOX), due to having "transformed over the past couple of years following inconsistent performance' following its IPO.
- Paycom software (PAYC), which Enders said has established itself with a "differentiated automation and self-service" software offering.
- Monday.com (NASDAQ:MNDY), due to its "flexible, collaborative approach" to cloud-based business software.
- Coupa Software (NASDAQ:COUP), which, while seeing its spending management platform come under some scrutiny, is likely to see "a potential for [business] reacceleration" with new offerings in supply chain and supplier management.
- Expensify (EXFY), due to an "attractive valuation" and opportunities in the small-and-medium-sized business market.
Enders said a recent Citi survey of chief financial and human resource officers has led the brokerage to believe that, even with the risks of a recession on peoples' minds, "[We] found what we believe to be a more resilient [spending] environment than expected."
Enders added that the market for what are sometimes called "back-office software" companies should continue to benefit from sector moves toward more transitions to cloud-based business scenarios and continuing automation of multiple business services.
Along with the companies that Enders said were Citi's top picks, the brokerage also started coverage of Appian (APPN), Asana (ASAN), Blackline (BL) Dropbox (DBX), OpenText (OTEX), Paycor (PYCR), Paylocity (PCTY), Pegasystems (PEGA), Workday (WDAY) and Vertex (VERX), and maintained coverage of Smartsheet (SMAR) all with neutral ratings.
Last week, several cloud-software stocks got a boost following an upbeat earnings report from Snowflake (SNOW) that suggested continuing strength for the data-warehousing market, in particular.