Bernstein's Favorites In The US SMID-Cap Software Space

Bernstein initiated coverage of SMID-Cap U.S. software stocks such as Tableau Software Inc DATA, ServiceNow Inc NOW, Autodesk, Inc. ADSK, Hortonworks Inc HDP, Red Hat Inc RHT and Teradata Corporation TDC.

• Tableau Software – Outperform/$79
• ServiceNow – Outperform/$120
• Autodesk – Outperform/$137
• Hortonworks – Outperform/$21
• Red Hat – Market Perform/$21
• Teradata – Underperform/$25

Tableau - Top Outperformer; Valuation to Expand

Analyst Zane Chrane singled out Tableau as his top Outperform on a 12-month horizon, with a highly attractive risk/reward.

The analyst believes Tableau hasn't got its due despite being the best-in-breed vendor in a market growing at over 20 percent. Chrane's analysis pointed to underappreciated competitive strength of Tableau's products and strong purchase intents by CIOs.

"We expect an accelerating subscription transition and improving execution under the new CEO to lead to upward revisions to revenue estimates and consequently to multiple expansion", the analyst said.

ServiceNow and Autodesk Have Attractive Growth, Risk Profiles

Bernstein thinks ServiceNow and Autodesk represent attractive growth stocks for investors with a longer time horizon. The firm feels these companies would exceed revenue expectations for many years.

Bernstein noted ServiceNow has a sustainable long-term revenue growth trajectory of 33 percent through fiscal year 2020, given that it's the leading SaaS vendor to IT departments. Given the company's massive total addressable market (estimated at $72 billion long-term), the firm thinks the market is underestimating the long-revenue growth potential.

Meanwhile, Bernstein said Autodesk has a protected long-term growth trajectory, as it transitions its large customer base to subscription. Though believing it's early into the transition, it appears similar to Adobe Systems Incorporated ADBE transition, and accordingly, expects long-term uplift in revenue and stock price.

"We believe the market underestimates long-term growth in new subscribers, just as the case was with Adobe," Chrane added.

Hortonworks – Cheap Call Option on Big Data and IoT Growth

Terming Hortonworks as a relatively cheap call option on growth in Big Data and IoT, Bernstein said the company has emerged as a preferred vendor in the fast-growing Hadoop market. The firm expects the stock to remain volatile until it achieves positive cash flow, which is expected to happen around the fourth quarter of 2017. That said, the firm believes the company can exceed long-term revenue expectations.

Teradata – Tactical & Structural Short

Bernstein sees Teradata as a tactical and structural short over the next 12 months. Though commending the company's turnaround as strategically sound, the firm said the effort has come late and would take many years. This, according to the firm, would lead to customer attrition.

The firm also thinks Teradata faces structural headwinds for revenue, with the consensus underestimating the large operating expenditure spend to support the strategy.

Positive on Red Hat; But Stock Consensus Long

The firm said the hybrid/private cloud-driven bull case appears well-understood. Although remaining positive on fundamentals, the firm rated shares at Market Perform, citing valuation.

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