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Plenty of opportunity exists in the $1-trillion global cloud software market, but investors should be careful about how they approach the space, according to Goldman Sachs.
The Cloud Analyst: Kash Rangan initiated coverage of 12 cloud software stocks with the following ratings:
salesforce.com, inc. (NYSE: CRM) initiated at Buy, $315 price target.
Microsoft Corporation (NASDAQ: MSFT) initiated at Buy, $285 price target.
Workday Inc (NASDAQ: WDAY) initiated at Buy, $300 target.
Adobe Inc (NASDAQ: ADBE) initiated at Buy, $580 target.
ServiceNow Inc (NYSE: NOW) initiated at Buy, $670 target.
Splunk Inc (NASDAQ: SPLK) initiated at Buy, $240 target.
Intuit Inc. (NASDAQ: INTU) initiated at Neutral, $430 target.
Snowflake Inc (NYSE: SNOW) initiated at Neutral, $310 target.
Elastic NV (NYSE: ESTC) initiated at Neutral, $190 target.
VMware, Inc. (NYSE: VMW) initiated at Neutral, $150 target.
Autodesk, Inc. (NASDAQ: ADSK) initiated at Sell, $270 target.
Oracle Corporation (NYSE: ORCL) initiated at Sell, $60 target.
The Cloud Thesis: The big run in most software stocks has skewed Goldman’s bullish coverage toward attractively valued, high-quality growth stocks, Rangan said in a Thursday initiation note.
Salesforce, Workday and Splunk will likely see improvements in their backlogs and an acceleration of free cash flow growth due to easy year-over-year comps, the analyst said.
Goldman is modeling 24% year-over-year FCF growth for Salesforce and 33% FCF growth for Workday in the second half of 2021.
In addition, Rangan said the market may be underestimating the potential for Microsoft Azure revenue growth to bounce back after dipping below 50%, boosting the company’s overall margins and profitability.
“We believe fundamentals continue to be strong as Digital Transformation catalyzes Cloud adoption and propels the sector, pandemic or not,” the analyst said.
The global cloud services market could be up to seven times larger than it is today in the long-term as more companies digitize their businesses, he said.
Benzinga’s Take: The pandemic rapidly sped up the economic digital transformation by forcing many companies to adapt to a remote working environment.
Some companies will likely return to their old way of doing things once the pandemic ends, but the vast majority will not.
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