Shopify could benefit from an acceleration in e-commerce, says Oppenheimer.
Andrew Harrer/Bloomberg
Another day, another set of recommendations for how to play the cloud.
Since the start of the year, a number of analysts have weighed in with thoughts on the outlook for the cloud software sector, after the group cranked out fantastic returns in 2020. On Thursday it was Oppenheimer analyst Brian Schwartz’s turn.
In a 116-page report, he laid out the case for taking a more selective approach to the sector this year, noting that multiple expansion is likely to be limited after last year’s fat gains. But he has plenty of stock picks to offer, and as part of his call adjusted ratings on several stocks.
“Our 2021 outlook … is positive because of the potential for outsized stock returns, though we expect share outperformance for this year to come more from upside to estimates and company-specific catalysts,” Schwartz wrote in his research note.
“SaaS [software as a service] technology presents a powerful market setting for durable growth and cash generation, and is experiencing accelerating market adoption from the Covid-19 pandemic,” he continued. “While SaaS valuations have reached the top shelf versus historical averages… we think the premiums are justifiable [because of] the scarcity of public SaaS names, investors searching for growth in a slow-growth macro recovery, heightened consolidation and private-equity interests for these names, investors playing catch-up and chasing performance, and low rates.”
Schwartz raised his ratings on both Shopify (SHOP) and ServiceNow (NOW) to the equivalent of Buy from the equivalent of Hold, and set target prices of $1,300 for Shopify and $600 for Service Now.
The analyst concedes that he’s “late to the party” on both stocks, but adds that he sees both companies gaining market share, innovating and “remaining in the Street’s good grades in 2021, even with any missteps.” He also downgraded eGain (EGAN) to the equivalent of Hold from the equivalent of Buy, in part because the stock has rallied 57% since mid-December 2019.
For Shopify, the analyst offered five reasons to own the e-commerce software company’s stock. First, he noted that the company operates in a “very large and accelerating” market. Second, he argued the company should be a “rule of 40” company for a long time to come—referring to companies that can grow revenue at better than 40% with gross margins above 40%. Third, he said the company can gain share in the global market; he also noted that the pandemic is driving an acceleration in e-commerce; and finally, he wrote that the company’s “international opportunity is still ahead.”
As for ServiceNow, Schwartz writes that the company “stands out … as the pioneering trailblazer in SaaS for IT services management.” He adds that ServiceNow “has transitioned and progressed over the years into a verifiable cloud platform success story as it rides atop a best-in-class and unified platform with multiple product pillars of substantial scale, profits, and growth trajectory.”
Schwartz includes both Shopify and ServiceNow on his list of top picks for 2021. Other picks include Adobe (ADBE), Paycom Software (PAYC), Coupa Software (COUP), Medallia (MDLA), and Workday (WDAY). He suggests that investors avoid Paylocity (PCTY) and 2U (TWOU), as well as eGain.
Despite the upgrades, Shopify was down 0.5%, to $1,194.27 on Thursday afternoon, while ServiceNow was off 0.7% to $518.04. eGain shares were down 0.8%, while the S&P 500 was up 0.1%.
Write to Eric J. Savitz at eric.savitz@barrons.com