'Hey above-median spender' - Jefferies highlights software/net picks
Kativ
Capital deployment is a key factor when choosing top stocks in the software and internet sector, according to a joint study by the Jefferies quant and equity research teams.
The teams looked at 10 years of data on 45 stocks with research coverage and market caps topping $1B to determine "the correlation between the amount of capital spend (capex, R&D, acquisitions) and subsequent outperformance in ROIC, revenue growth, and stock returns."
"Best factor: total spend to invested capital ratio," analyst Brent Thill wrote. "Companies with above median spend to IC had superior stock performance (36% over 2 years and 58% over 3 years compared to companies with below median spend) and faster sales growth (CAGR 11-12% better)."
"Acquisition spend was a poor predictor of stock outperformance (only low single digit %)," Thill said. "These speak to the importance of efficient and strategic capital allocation."
The teams split stocks into four subcategories:
Infrastructure software
Favorable (current capex spend leaders for whom higher capex spend was rewarded by the market in the past)

Fortinet (FTNT), current capex/IC 32.6%, difference vs. sector median 22.8 percentage points
Cloudflare (NET) 30.2%, 20.3 ppt
Datadog (DDOG) 17.4%, 7.6 ppt
Microsoft (MSFT)16.0%, 6.2 ppt

Lacking catalysts (low levels of capex spend now relative to sector median)

Snowflake (SNOW) 10.7%, 0.9 ppt
Oracle (ORCL) 9.8%, 0.0 ppt
Palo Alto Networks (PANW) 5.9% -3.9 ppt
Dynatrace (DT) 2.2%, -7.6 ppt
Elastic (ESTC) 1.7%, -8.2 ppt
Splunk (SPLK) 1.6%, -8.3 ppt
Progress Software (PRGS) 0.6%, -0.9.2 ppt

Application software screening
Favorable (current R&D spend leaders for whom higher R&D spend was rewarded by the market in the past)

Atlassian (TEAM) R&D/IC current 5,911.7%, difference vs. sector median 5,866.1 ppt
DocuSign (DOCU) 206.3%, 160.7 ppt

Unfavorable (current R&D spend leaders for whom higher R&D spend was NOT rewarded by the market in the past)

Asana (ASAN) 239.2%, 193.5 ppt
Smartsheet (SMAR) 225.0%, 179.4 ppt
Dropbox (DBX) 177.9%, 132.3 ppt
Workday (WDAY), 87.1%, 41.5 ppt

Lacking catalysts(low levels of R&D spend now relative to sector median)

Procore (PCOR) 45.6%, 0.0 ppt
Adobe (ADBE), 23.6%, -22 ppt
Intuit (INTU) 11.9%, -33.7 ppt
Salesforce (CRM) 8.9%, -36.7 ppt
MicroStrategy (MSTR) 4.7%, -40.9 ppt
Instructure (INST) 4.6%, -41.1 ppt
PowerSchool (PWSC) 3.3%, -42.3 ppt

Social media
Favorable (current R&D leaders for whom higher R&D was rewarded by the market in the past)

Meta (META) 32.1%, 4.2 ppt
Alphabet (GOOG) (GOOGL) 27.9%, 0.0 ppt

Lacking catalysts (low levels of R&D now relative to sector median)

Match Group (MTCH), 11.7%, -16.2 ppt
IAC (IAC), 6.5%, -21.4 ppt

Other software/internet
Favorable (current R&D leaders for whom higher R&D was rewarded by the market in the past)

Upwork (UPWK) 100.4%, 72.5 ppt
Sonos (SONO) 79.0%, 51.1 ppt
Amazon.com (AMZN), 32.3%. 4.4 ppt
Etsy (ETSY) 30.4%, 2.5 ppt

Lacking catalysts (low levels of R&D now relative to sector median)

GoDaddy (GDDY) 22.8% -5.1 ppt
Chegg (CHGG) 20.3%, -7.6 ppt
eBay (EBAY) 17.8%, -10.1 ppt


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