4 Software Stocks That Can Rally Even in a Weaker Economy


Photograph by Maxwell Ridgeway

After a big drop in stock prices due to worries about slowing global growth, Evercore ISI is telling its clients that several software stocks can do well even in a weaker economic environment.

"While macro headwinds are likely to persist into 2019, we believe that the secular trends around digital transformation and continued M&A activity should help power software stocks higher in 2019," analyst Kirk Materne writes on Wednesday.

He notes that the iShares North American Tech-Software exchange-traded fund (ticker: IGV) has outperformed the S&P 500 by about 18 percentage points this year amid political uncertainty, rising rates, and trade war concerns. Materne said nearly 70% of the sales for the top 25 software companies are recurring, versus just 42% in 2008, which will serve as a more stable flow of revenue during a recession.

"Businesses continue to recognize the importance of investing in software in order to compete more effectively in a digital economy," Materne writes. "Business models are more resilient today vs. prior cycles."

Here are four Outperform-rated software companies that made his favorite ideas list for 2019, along with their price targets.

• Microsoft (MSFT)

The firm has a $128 price target for Microsoft stock, representing a 23% upside from Wednesday's close.

"We believe Microsoft remains well positioned to continue to deliver steady top line and bottom line growth over the next 3-5 years given the breadth of its cloud portfolio, its growing annuity revenue base, and its strong balance sheet," Materne writes.

The company has more than $70 billion in net cash, he notes, which may be used to acquire new applications to broaden its offering in enterprise software.

• (CRM)

Evercore ISI has $170 price forecast for Salesforce shares, representing a 30% upside from Wednesday's close.

"Salesforce remains one of the best pure-play SaaS [software as a service] stories, levered to trends around enterprise digital transformation and the product portfolio is well positioned to drive 20% growth over the next few years," Materne writes.

The analyst predicts the company will sell into more industries, such as banking, retail, government, and health care.

• ServiceNow (NOW)

The firm has a $230 price target for ServiceNow stock, representing a 32% upside from Wednesday's close.

"We believe that ServiceNow is increasingly being viewed as a strategic platform as opposed to a collection of IT applications, and at the same time, the new market opportunities ServiceNow is playing in are becoming increasingly greenfield," Materne writes.

The analyst argues the company has an addressable market of more than $86 billion for its offerings.

• Zendesk (ZEN)

Evercore ISI has a $70 price target for Zendesk stock, representing 25% upside from Wednesday's close.

"We continue to believe Zendesk is becoming an increasingly strategic platform for customer support and sales organizations, and the move upmarket is progressing well," Materne writes.

The analyst is optimistic about the company's expansion into more sales channels and recent sales hires.

Write to Tae Kim at

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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