Software Analyst Says Datadog, Splunk, Zscaler Are Exceptions To Looming Spending Headwinds

The COVID-19 pandemic has impacted companies, their financials and spending plans, and the software sector is no exception. An analyst at Rosenblatt Securities

singled out a few companies that could weather the adversity better than others.

The Datadog, Splunk, Zscaler Analyst

Analyst Yun Kim has Buy ratings on the shares of Datadog Inc DDOG and Splunk Inc SPLK. The analyst has a $61 price target for Datadog and $200 price target for Splunk.

Kim has a Neutral rating on Zscaler Inc ZS with a $58 price target. 

Takeaways On Software 

The software industry is seeing increasing number of project cancellations and delays, putting pressure on the budget that was already allocated to new IT initiatives that have yet to kick off, Kim said in a Thursday note. (See his track record here.)

The pace of new IT initiatives is likely to slow for the remainder of the year, which in turn will have a direct impact on new software purchases, the analyst said. 

There are also signs of sales cycle lengthening as buyers begin to scrutinize all deals, he said. 

Kim forecast a delay in some key sales processes such as ROI analysis, use case prototyping and presentation to key stakeholders, affecting the sales velocity of deals in the pipeline.

"Hence, we believe these additional factors that lengthen the sales cycle could put additional pressure on deal flow in 2H of the year for software vendors."

Kim identified some exceptions to the looming spending headwind for software companies.

See also: 10 Software Top Picks For 2020: Do You Own Them?

Analyst Says Zscaler Strategically Positioned

The firm is of the view that Zscaler is the clear beneficiary of the work-from-home trend and a broader virtualized work environment adoption theme, Kim said.

These trends will lead to increased usage of cloud, especially by organizations that have adopted Office365, the analyst said. 

"In our view, ZS's value proposition of providing security for remote users at a reduced cost strategically positions the company at the top of the spending priority at almost all organizations in light of COVID-19." 

Rosenblatt expects a typical sales cycle of three to nine months for new customers looking to deploy Zscaler. 

Increased Cloud-Based Workloads Benefit Datadog, Splunk

Cloud infrastructure management vendors are likely to get a shot in the arm from the acceleration in the ongoing secular trend around new workloads and data migration to the cloud, Kim said.

The need to monitor performance and troubleshoot any issue will likely become a key priority, the analyst said. 

Datadog and Splunk are two vendors in Rosenblatt's coverage universe that will likely benefit from the trend, he said. 

The analyst also noted that these two vendors are the most common technology stack found on Amazon.com, Inc.'s AMZN AWS and Microsoft Corporation's MSFT Azure.

Datadog, Splunk, Zscaler Price Action

At last check:

Datadog shares were trading 1.08% higher to $34.67. 

Splunk shares were trading down 3.68% at $124.39. 

Zscaler shares were down 0.94% at $59.98. 

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