Wells Fargo sees three big themes driving software in 2022
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The start of the year has brought forth anticipation that in 2022 software companies will find ways to return to a state of normality after a year of underperformance across the sector.
That's the basic thesis put forth by analysts at Wells Fargo, who said that this year "will ultimately prove rewarding" for the companies that can demonstrate better-than-expected growth profiles and are able to take advantage of emerging product areas. The Wells software analysts said they expect a set three themes to emerge that could benefit specific companies that are in the right place at the right time.

"We remain selective with our ratings and recommendations," said the Wells analysts in a report on the outlook for software this year. "[We are] favoring those companies with more tangible valuation backstops and identifiable catalysts ahead."
Among the themes the Wells analysts see emerging this year is "incumbent" software leaders will "reinforce their moats" due to factors such as their size and willingness to consolidate. "The likely end result, in our view, is a 'rich get richer' scenario benefiting multiple large-cap platform in software," said the Wells analysts in their outlook.
The large-cap software companies that Wells said are its top picks for the year are Microsoft (NASDAQ:MSFT) and Workday (NASDAQ:WDAY). For Microsoft (MSFT), Wells Fargo said there's no real secret behind what makes the company a strong choice for software industry success this year.
"Microsoft has an entrenched market position with enterprises around the globe with regard to applications as well, derived from the company's stronghold on the operating system and core productivity applications," said the Wells analysts.
Workday (WDAY) got high marks for being the market leader in human capital management [HCM] software, "and is addressing the needs of both the CHRO [chief human resource officer] and the office of the CFO." Wells said Workday (WDAY) is also benefiting from companies looking to purchase complete packages of financial planning and workforce management software.
Another theme that Wells said will drive the software sector this year is labor shortages creating a need for more automated services. Wells said this is in great part a result of the workforce being impacted by the Covid-19 pandemic that has resulted in "a tightening labor pool, which is driving up costs for labor [and] especially technical [and] specialized talent."
Wells listed UIPath (NYSE:PATH) as its top automation software pick, saying that "it offers the broadest set of automation capabilities" in the market. "We think this is particularly important as organizations grapple with how to manage the entire process of automating a significant portion of both front and back office processes, especially in a tight labor market," said the Wells analysts, who also upgraded UiPath (PATH) to overweight from equal weight.
The third software theme Wells said it is looking for this year is for "a new data paradigm" to come into focus. Wells said this is likely due to a series of changes in regulations around data that are "presenting a need for a new era of data infrastructure" that includes data collection, transfer, management and governance.
Wells said ZoomInfo (NASDAQ:ZI) stands as its best pick for data software, as it offers contact and company search technology, data-as-a-service, buyer intent and conversational intelligence software. Wells said ZoomInfo's (ZI) software platform delivers "high quality data cleansing and enrichment for sales, marketing and recruiting teams."
In late December, Morgan Stanley analyst Keith Weiss said that the data management market could be a major area of focus for Microsoft (MSFT) in 2022.