Things are not looking good for the design software company Autodesk (ADSK). Shares have plummeted 5% in the three days following its August 27 announcement that the ongoing trade war with China could weigh down its earnings in the second half of 2019.
The bad news didn’t end there. Merrill Lynch’s Kash Rangan told investors that there’s likely weakness in manufacturing and construction activity in key geographical regions, leading to his conclusion that growth isn’t in store for ADSK anytime soon. As a result, he downgraded the rating from a Hold to a Sell on August 28.
That doesn’t mean investors should steer clear of software stocks all together. Monness’ Brian White has bet on Slack Technologies (WORK) based on its “exciting possibilities”, initiating coverage with a Buy on August 26.
With this in mind, let’s take a closer look at each to see why the best performing analysts pick Slack instead of Autodesk.
No Turnaround in Sight for Autodesk
You wouldn’t guess it from the recent beating shares have taken but ADSK actually posted a fiscal Q2 2020 earnings beat.
EPS came in ahead of the $0.61 consensus estimate at $0.65. Sales gained 30% year-over-year reaching $797 million. This is all well and good, but investors were not impressed with the company’s full year fiscal 2020 guidance.
Management cut its expectations for annualized recurring revenue, with its expectations for profits also falling below consensus estimates. Adding to the bad news, sales are expected to grow at a lower rate than what was seen in fiscal Q2.
“Autodesk’s business outlook for the third quarter and full year fiscal 2020 takes into consideration the current economic environment and foreign exchange currency rate environment,” the company stated in its earnings report.
Rangan tells investors that lowered expectations across the board signal weakening in manufacturing and construction in its key regions including the UK, Germany and China. Based on these headwinds, the analyst not only downgraded the stock but also cut the price target from $170 to $127, suggesting 11% downside. The five-star analyst noted that the valuation multiples would be reduced as well to reflect lowered hopes for growth going forward.
All in all, the Street takes a more bullish stance on ADSK. It has a ‘Moderate Buy’ analyst consensus as well as a $168 average price target, implying 18% upside potential.
Strong Growth Possibilities for Slack
Despite its 26% decline since its June 20 IPO, Monness believes the cloud-based team collaboration software provider is heating up with it already being considered a staple in the workplace.
“We believe Slack is one of the next-generation software platforms that leadership at organizations around the world will increasingly equip their employees with during this digital transformation journey,” White wrote in a note to clients.
He explained, “As evidenced by the 82% revenue growth achieved in fiscal year 2019, Slack has clearly struck a chord as a collaboration tool for workers and we believe the evolution of this new software layer in the organization has exciting possibilities.”
Adding to the good news, the company announced on August 14 that even more product improvements are on the way. Slack developed an Announcements channel as a way to send a message to the entire organization about administrative matters such as changes in HR policy or software updates. In addition, it allows admins to limit who can send messages as well as who can respond.
It also stated on the same day that it’s adding new APIs for creating templated workspaces and automating the approval process for tools used inside Slack channels or workspaces.
Based on all of these positive developments, White initiated his coverage with a Buy and set a $39 price target. The five-star analyst argues that share prices could gain as much as 36% over the next twelve months.
With 9 Buy ratings vs 6 Holds received in the last three months, the consensus among analysts is that Slack is a ‘Moderate Buy’. Its $40 average price target implies 38% upside, demonstrating more than double the upside of ADSK.