By Senad Karaahmetovic
In a client note released today, Goldman Sachs analyst Kash Rangan has discussed the software sector amid the recent selloff.
Software multiples are down 46% compared to the January peak, which reflects “waning” investor sentiment, according to Rangan.
“We note that results in software were mixed and market reception was lukewarm at best (GS coverage universe down -5%, on average, since reporting 1Q results). 1Q results came in either in-line or slightly above expectations, which we believe was not enough for stocks such as such as SNOW, RNG, TWLO, and DDOG, where investors have become accustomed to pandemic-driven large magnitude revenue beats to support premium revenue multiples. More importantly, however, were forward-looking indicators (cRPO, bookings, backlog, pipeline) and FY guidance on revenue, operating margins and FCF,” Rangan wrote.
However, Rangan expects Q3 business comps to ease after Q2 while the market could see a positive reaction from “conservative/de-risked 3Q guide.” Overall, the Q2 earnings season “could signal the through in net new business.”
The software sector has been “disproportionately impacted by the rotation out of high-growth, high multiple names,” Rangan adds. This has resulted in a situation where many companies trade at a sizable discount to their intrinsic value. Goldman Sachs reminds clients that software stocks started to bottom during GFC once they reported the first set of disappointing results.
Rangan picks 6 companies (growth + profits) that will act as defensives during market turmoil. These are Microsoft (NASDAQ:MSFT), Salesforce (NYSE:CRM), Datadog (NASDAQ:DDOG), Intuit (NASDAQ:INTU), and Workday (NASDAQ:WDAY).