Morgan Stanley believes investors need to be more selective in picking software stocks this year after the industry’s big rally in 2019.
The iShares Expanded Tech-Software Sector exchange-traded fund (ticker: IGV) rose 34.3% last year versus the S&P 500’s 31.5% total return.
“After a strong performance across software in 2019, full multiples and indications of a slowing software spending environment, investors likely need a finer filter to find the really compelling opportunities in the sector,” Morgan Stanley analyst Keith Weiss wrote on Monday.
The analyst said most software valuation multiples based on enterprise value to sales “appear rich,” but select names on an enterprise value to free cash flow basis look more reasonable.
Here are three Overweight-rated software companies that made the firm’s top software stock ideas list for 2020.
Morgan Stanley has a $410 price target for Adobe stock.
Adobe has “one of the strongest franchises in software, benefiting from the secular shift towards digital marketing,” the firm’s analyst wrote.
The firm believes earnings estimates may go higher for the company in the future. Adobe shares were up 1.5% to $344.94 on Monday.
The firm has a $216 price target for Salesforce.com shares.
“With a cloud-based platform automating and optimizing all stages of the customer life cycle, Salesforce.com looks best positioned to benefit,” Morgan Stanley’s analyst wrote.
Salesforce.com shares were up 2.1% to $183.99 on Monday.
Morgan Stanley has a $189 price target for Microsoft shares.
“As the IT conversation shifts from pure Public Cloud towards hybrid Cloud architectures involving enterprises utilizing a mix of on-premise and public cloud resources, Microsoft pulls ahead as the best secularly positioned firm in tech,” he wrote.
Microsoft shares were up 0.9% to $162.86 on Monday.