Is software headed for 'first half pain, second half gain' in 2023?
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The outlook for software stocks in 2023 appears to be a tale of to halves of the year, according to a new report from analysts at Jefferies.
The Jefferies team, led by analyst Brent Thill, said that investors in many software companies should expect a "first-half pain, second-half gain" scenario this year as the industry tries to come back from two-straight years of underperformance against the S&P 500 and anticipated pressure from the broader economic environment. Thill & Co. estimate that 90% of the software industry will show "decelerating growth" this year.
However, Thill said that the sector is likely to show fundamentals rebounding by the second half of 2023, including software stocks rising as "negative sentiment" provides support for share-buying opportunities.
Thill said such a scenario provides some enthusiasm for Microsoft (NASDAQ:MSFT), which while it might "not be set up for a breakout," its "financial strength, leverage and visibility" will end up driving the stock's outperformance this year.
For Oracle (NYSE:ORCL), Thill raised his rating on the company's stock to buy from hold, with a price target of $105-a-share, and called its "an outlier in software" as it recently gave an upbeat outlook that showed "increased confidence and visibility into the growth drivers of the business.
Among other software stocks that Thill is positive about for 2023 include:
Workday (WDAY), which Thill said should power higher due to policies of new Chief Executive Carl Eschenbach and "resilient" demand for back office apps.
Snowflake (SNOW) also got high marks for being "the best hypergrowth story" in software, while Thill said Okta (OKTA), which reported strong quarterly results in December, was "our favorite cyber[security] name" as the company is involved in "a large and underpenetrated market."
However, CrowdStrike Holdings (NASDAQ:CRWD) was viewed more skeptically that some of the other software stocks in Jefferies coverage. Thill cut his rating on CrowdStrike (CRWD) to hold from buy, and said 2023 would be a tougher year for the company as it turns into "a grinder versus [a] high flyer."