Jefferies Says Software Still Strong, But Focus on Apps, Large Caps; Microsoft Gets Upgrade

The software industry remains viable for stock buyers, but they should focus on apps, rather than infrastructure, where many companies face the threat of being "Amazoned" out of market share, a Jefferies analyst said in a look at the sector.

And in light of macroeconomic trends, stock pickers should probably focus on the large cap companies, the analyst said, highlighting top industry pick Microsoft Corporation MSFT.

The Analyst

Jefferies analyst Brent Thill upgraded Microsoft from Underperform to Buy and raised the price target from $93 to $160.

Thill downgraded three stocks:

Oracle Corporation ORCL from Buy to Hold, lowering the price target from $66 to $60;

Carbonite Inc. CARB from Buy to Hold, lowering the target price from $29 to $17;

Check Point Software Technologies Ltd. CHKP from Buy to Hold with a price target drop from $140 to $115.

The Thesis

Jefferies remains positive on the software industry but is looking to be more defensive considering valuation and macroeconomic concerns. And considering that macroeconomic backdrop, Jefferies’ top picks are all large-cap companies: Adobe Inc ADBE, salesforce.com, inc. CRM and Intuit Inc. INTU, in addition to Microsoft.

Thill said he favors apps, over infrastructure business, given a perceived threat from Amazon.com Inc. AMZN, whose Amazon Web Services threatens everyone else in the infrastructure space. Applications, unlike infrastructure, can’t be “Amazoned out,” said Thill.

“We believe the best way to play the software Industry is to focus on apps and on large-cap names with good growth profiles and valuation on their side,” Thill wrote in a note. “We believe the best way to play infrastructure is through AMZN.”

Jefferies thinks the high multiples in recent IPOs, including those for Slack Technologies Inc WORK, Zoom Video Communications Inc ZM and Crowdstrike Holdings Inc CRWD are unsustainable.

Price Action

Several stocks in the sector were heading down on Tuesday, with Carbonite among the big losers, down 5.9% to $14.34. Oracle was off 1.44% at $54, Check Point Software was down 1.42% to $109.33.

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