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Investment firm HSBC launched nine software-based companies citing trends in cloud, artificial intelligence and digital transformation that could drive growth.
The company gave buy ratings to Fortinet (FTNT) and Synopsys (SNPS); maintain qualifications for Adobe (NASDAQ:ADBE), Akamai Technologies (NASDAQ:AKAM), Asanas (ASAN), Autodesk (NASDAQ: ADSK), to sense (INTU) and Palo Alto Networks (NASDAQ:PANW); and a reduced rating at Fair Isaac Corporation (ICO).
“We highlight companies that we believe are at critical stages of their operations with their leveraged operating models poised to deliver better operating performances than their peers given strong demand,” analysts Stephen Bersey and Abhishek Shukla in a September note.
“The software models of these companies have inherent operating leverage,” they added.
The firm warned that that leverage will be non-linear with periods of enhanced leverage, decreased leverage, and even negative leverage.
Key trends that are combining to drive above-market revenue growth, even amid an uncertain macroeconomic backdrop, include:
- Cloud: In our opinion, the economic and agility benefits remain clear. We believe the shift to the cloud is still in an early stage and we expect a decade or more of elevated demand.
- Digital Transformation: COVID-19 highlighted the urgency of digital transformation to gain business agility and continuity through any unforeseen obstacles.
- ai: We see the promise of ai given the many opportunities to improve the features and performance of many existing software platforms and solutions. However, the timing and magnitude of monetization remains unclear; We take a conservative short-term view.
Analysts note that the market may be overlooking “many positive attributes” in the current context of uncertainty.
“Software typically has a high return on investment (ROI), and software projects often perform well on clients’ investment pipelines when capital budgets are under pressure,” the firm added.
“Software improves productivity, and if companies must respond to a deteriorating macroeconomic environment by cutting staff, software can offset workforce shortfalls and help stabilize ongoing operations.”
