Microsoft and Two Other Software Stocks for a Potential Recession

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The possibility of a bad recession is on everyone’s mind.

On Tuesday, Bernstein software analyst Mark Moerdler says investors need to assess which companies are better positioned for such a negative economic scenario.

“We are seeing a significant increase in clients’ inquiries just asking what would happen to software/cloud in a recession,” he wrote. “We believe, that quality is going to shine through, and those businesses with higher exposure to enterprise revenue streams, deep moats around their business, and strong or at least improving margins are likely to fare better.”

The good news is investors can buy in at a discount. Software stocks have tumbled, along with the general market. The

iShares Expanded Tech-Software Sector

(IGV), which tracks the performance of a widely followed software-sector index, has declined 25% this year, compared with the 13% drop for the

S&P 500
.

Here are the three Outperform-rated software stocks that Moerdler believes are among the best to own.

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Microsoft

(

MSFT

)

“Microsoft has very broad revenue streams and all shapes and sizes of organizations and consumers,” he wrote. “Overall we believe the company holds up well.”

The analyst said the software giant’s cloud-computing unit also has less exposure to smaller vulnerable startups and consumer internet customers than its main competitor. He has a $365 price target on Microsoft stock.

Last week, Microsoft slightly lowered its financial guidance for the June quarter due to a negative impact from moves in foreign exchange. In an environment where many other technology companies are citing more-difficult macroeconomic conditions, a small reduction in Microsoft’s forecast could suggest the company’s business is more resilient those of peers.

Oracle

(

ORCL

)

“Oracle has historically been one of the safest stocks in software,” Moerdler wrote. “For safety with some growth, Oracle is likely the best investment within our software/Cloud in a recession.”

He noted Oracle databases are required to run essential business transactions for large corporations which should prove harder to cut than other discretionary software purchases. He has a $102 price target on Oracle stock.

Adobe

(

ADBE

)

“While it is true that Adobe’s solutions are used by advertisers, their customers are predominantly large enterprise companies,” Moerdler wrote. “Adobe does not charge for their Experience Cloud based on the volume of advertising, so this business is likely relatively immune other than in a very severe recession.”

The analyst also said Adobe’s creative professional customers rely on the software to generate their income, so aren’t likely to cancel their subscriptions either. He has a $600 price target on Adobe stock.

Write to Tae Kim at [email protected]