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An improving economy once widespread COVID-19 vaccinations are delivered could usher in a new set of software winners, according to a J.P. Morgan analyst.
Some high-multiple software names could be in for a wakeup call come the June quarter, wrote J.P. Morgan’s Sterling Auty, who downgraded a series of high-flying software names like Zoom Video Communications Inc. ZM, -3.31%, Okta Inc. OKTA, -3.24%, DocuSign Inc. DOCU, -3.10% and CrowdStrike Holdings Inc. CRWD, -3.50% to neutral from overweight in a Wednesday note to clients. Auty stressed that the 20 highest-multiple stocks at the end of 2009 outperformed the software industry average in 2010, after the financial crisis, a trend that could repeat once the economy gets back into gear.
“These ratings changes by no means reflect anything on the tremendous operating condition of these names, but rather our view that an expanding economy could cause sector rotation and potential performance headwinds for these types of stocks like they did in 2010,” Auty wrote.
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At the same time, he sees greater potential for “cyclically sensitive names,” including Intuit Inc. INTU, -1.11%, Autodesk Inc. ADSK, +0.90%, Wix.com Ltd. WIX, +1.21%, and Altair Engineering Inc. ALTR, +1.15%, and he upgraded these to overweight. He previously had a neutral rating on shares of Autodesk, Wix, and Altair as well as an underweight rating on shares of Intuit.
“If economic expansion does materialize beginning in the June quarter, we believe these stocks will be direct beneficiaries,” he wrote. Design-focused companies could benefit from a bounce back in manufacturing, industrial, and constriction projects, which could all be critical to a rebounding economy, according to Auty. Intuit and Wix are among companies with exposure to the small-business landscape as the Census Bureau has already disclosed a surge in applications for new businesses.
Auty also downgraded shares of Check Point Software Technologies Ltd. CHKP, -1.81%, Fortinet Inc. FTNT, -4.12%, and Palo Alto Networks Inc. PANW, -1.53% to underweight from neutral, reflecting an evolving view on the cybersecurity landscape.
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“The increasing shift of compute to the cloud will likely deemphasize the significant spend we have seen through the years on firewall upgrade cycles,” he wrote. “Each of the above vendors has begun shifting its product portfolio to benefit from securing customer cloud initiatives, especially Palo Alto Networks. But the large revenue contribution that is still tied to on-premise firewall spend is likely to come under increasing pressure as 2021 unfolds, and that could be a headwind to stock performance.”
The ratings changes come amid a strong year for the software sector as a whole, with the iShares Expanded Tech-Software Sector ETF IGV, -0.80% up 46% as the S&P 500 SPX, -0.17% has risen 15%.
