Baird's cloud software picks for '22 have margins, cash flow in focus
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A look ahead to 2022 among cloud software names - and a preview of Q4 earnings season - has Baird lowering price targets across the board amid some price/valuation compression, but looking for names that can emerge from the pack with growth to show for it this year.

With an environment of rising interest rates, it's focusing on the companies that can offer a "strong combination of growth, profitability and competitive strength."
And right away its top picks for the space are Five9 (NASDAQ:FIVN) and Axon Enterprise (NASDAQ:AXON). Five9 is the cloud contact center leader that's benefiting from digital transformation and "work-from-anywhere" tailwinds; it's "one of the strongest combinations of growth, profitability and competitive position in our software coverage." And Axon is the public safety leader, with its own strong competitive position in Taser, body cameras and (increasingly) software, and it has solid margins and cash flow.
Margins and cash flow come in for special focus in Baird's estimation. The covered names with the highest operating and cash flow margins include Zoom Video Communications (NASDAQ:ZM), Akamai (NASDAQ:AKAM) and Ziff Davis (NASDAQ:ZD). It's positive on security growth and strong margins at reasonable valuation at Akamai and likes the Ziff Davis cash flow, adding that Amdocs (NASDAQ:DOX) also looks good on cash flow.
The firm is also positive in the long-term on growth leaders that also include DocuSign (NASDAQ:DOCU), Twilio (NYSE:TWLO) and RingCentral (NYSE:RNG), though lacking profitability may be an overhang for Twilio and competition a key concern for RingCentral.
Its top big-cap pick for cloud software is Apple (NASDAQ:AAPL), which also scores well on its margins/cash flow measures, though "we would be more aggressive on any weakness following a strong 2021." Baird cut price targets on every stock in the sector coverage except for Apple, where it raised the target to $185 from $170.
The top small-cap pick is Bandwidth (NASDAQ:BAND), which should benefit from "international cross-selling and easier comps through the year," though it also likes ShotSpotter (NASDAQ:SSTI) in the micro-cap space.
Its investor sentiment survey suggests that Communications and Unified Communications are out of favor, and yet Twilio (TWLO) is the highest-conviction name among respondents, just ahead of Five9 (FIVN) and DocuSign (DOCU). The investors were most concerned with Zoom (ZM) and RingCentral (RNG).
While Baird cut price targets on more than a dozen names (with AAPL the exception that got a boost), it only downgraded its rating on one stock: It cut 8x8 (NYSE:EGHT) due to a lack of catalysts and some difficulty speeding up service revenue growth.