The stocks of Microsoft Corp. rose 0.033% on Tuesday after Jefferies analyst Brent Thill said the next phrase:
“It’s time for software investors to get picky.”
Thill picked up the company’s coverage of the software sector at the beginning of the week with a swirl of rating and price target changes “to be more defensive in light of valuation and macroeconomic concerns.”
In his research note, Thill says he remains positive on the software industry in general. But he highlights that there has to be “a more selective approach to stocks given rich valuations.”
Thill also increased the company’s rating on Microsoft shares to Buy from Underperform (and that was his only upgrade) with a new target of $160, up from $93. However, Oracle (ORCL) was downgraded from Buy to Hold, with a new target of $60, down from $66.
Moreover, Check Point Software Technologies (CHKP) were downgraded to Hold from Buy as well as Carbonite (CARB), with a new target of $17, from $29. Thill also pushed back a little a price target on Citrix Systems (CTXS), CrowdStrike Holdings (CRWD), Dynatrace (DT), SolarWinds (SWI), VMware (VMW), and Workday (WDAY).
Nevertheless, he characterized the high multiples associated with recent IPOs like Zoom Video Communications (ZM), Slack Technologies (WORK), and CrowdStrike as “unsustainable.”
“Given the recent macroeconomic backdrop, we favor large-cap names within our coverage universe [Microsoft, Salesforce (CRM), Adobe (ADBE) and Intuit (INTU)] with a balance of good growth and multiple support. We favor applications as they cannot be ‘Amazoned’ out, and we would be more selective on the infrastructure side. We would play defense on the highfliers in the short term.”
He comments that there is a huge growth drivers in Azure, Office, and LinkedIn, and notes the company is “levered to favorable secular trends,” resulting in profitability and free cash flow from the growth itself.
He also confirms that Microsoft has been frequently returning money to its shareholders. As a matter of fact, the company bought back $72.5 billion of stock since June 2014.
Thill also stressed out that Microsoft shares have outperformed both Oracle and the IGV software stock index year-to-date, “and over the last one, three, five, and 10 years.”
Thill also stated:
“In large cap, we prefer Microsoft over Oracle given the former’s double-digit revenue growth at scale. We note that Oracle has significantly underperformed the IGV [software ETF] IGV, -1.39% on a three-year, five-year and 10-year basis as the company loses ground in the infrastructure business as workloads migrate to the cloud.”
He targeted the new price target at $60 on the stock, down from $66 prior. Oracle shares were down 1.1% in after-hours trading.