The optimistic way to think about Monday’s mammoth selloff is that the market staged a giant clearance sale. And there are bargains to be had.
RBC Capital Markets analyst Alex Zukin sorted through the carnage in the enterprise-software sector Monday night and found three names to recommend: Salesforce.com (CRM), Zendesk (ZEN), and Workday (WDAY). He’s not calling a market bottom, but Zukin thinks all three stocks deserve attention as you go picking through the wreckage.
Salesforce, he writes, remains his top pick. The stock as of Monday’s close was down 21.6% since peaking on Feb. 20, and was just 6% above its recent Oct. 22 trough at $142.33. He finds that the cloud-software company has “multiple growth levers” to pull this year, with the completion of its acquisitions of Tableau and MuleSoft.
“Salesforce is well positioned to gain wallet share among existing customers,” he writes. “We believe this position is even more enhanced should there be a protracted economic downturn in which IT budgets are cut and the number of vendors within typical IT environments gets rationalized, as Salesforce’s broad product portfolio, incumbent platform position, and leading enterprise go-to-market organization all combine to put the company in a pole position to support organizations’ digital transformations.”
Zukin says the company’s current-year revenue guidance of 23% growth is conservative enough that a significant downward revision is unlikely even in a worsening macro environment. And he adds that Salesforce has something that the big crop of recent cloud-software IPOs lacks: longevity.
“Salesforce was founded two decades ago, has seen multiple economic cycles, and we believe its leadership understands better than most how to position the company’s messaging and strategy to cater to customers’ changing needs in times of economic volatility,” he writes. “Additionally, as the company is one of the largest cashflow generators in the software sector, we believe it is well positioned financially to weather a potential downturn.”
Zendesk, Zukin writes, “is among our favorite ideas as market volatility continues amid the COVID-19-related sell off.” Given the enterprise-software company’s “expanded product portfolio, conservative guidance, and attractive valuation,” the shares offer an opportunity “to buy one of the most strategic enterprise software names...[we] would be buying right here, right now.”
Zukin writes that the company, which sells software used to run help desks, has been “vocal and open about the risks to its business that the coronavirus pandemic poses, with nearly 50% of the company’s bookings are outside the US, and a good portion of that in Asia.” Nonetheless, he finds that Zendesk is “well capitalized and in a strong position to withstand short-term pain,” with more than year’s worth of expense coverage on its balance sheet.
He writes that Zendesk would “meaningfully outperform other names under coverage through an extended period of weaker demand trends.” And he adds that “in a weaker demand environment, customer retention remains critical, and we do not view Zendesk spend as discretionary for most customers.”
Workday, Zukin argues, is “well-positioned to be a relatively safe haven in this storm.” He sees an opportunity to buy “a multi-year durable growth story in one of the most attractive markets in cloud software.” He notes that with the company’s software increasingly ingrained in HR and financial back-office systems, it would be inherently difficult to shut off Workday or switch to another provider. And he adds that the company has a customer base that skews to larger enterprises, with a net retention rate above 100%.
Zukin has previously asserted that Workday could be an interesting acquisition candidate for Microsoft (MSFT), and he now adds that you can make the same case for Amazon.com’s (AMZN) Amazon Web Services or Alphabet’s (GOOGL) Google Cloud, the other key players in the public cloud.
“In the coming war for data, owning the employee data graph, work graph, and social graph represents strategically significant opportunities that could power meaningful insights and create further commercialization opportunities” for a potential buyer, Zukin writes.
Amid Tuesday’s broad market rebound, Salesforce is up 2.6%, at $155.17, Zendesk is up 3.6%, at $70.45, and Workday is up 4.1%, at $148.78. The S&P 500 is up 1.5%.
