Software stocks are having a rough ride so far in 2022, as investors continue to shed high-growth, high-multiple names in the face of rising interest rates. Oppenheimer analyst Brian Schwartz notes in a lengthy report on the sector Thursday that the average stock in the group is down about 20%, with many names off 50% or more from previous highs.
As part of his broad looks at the group, Schwartz turns bullish on
(ticker: PATH), a provider of robotic process-automation software that came public in 2021, boosting his rating on the stock to Outperform from Perform, while cutting his rating on the German enterprise software giant
SAP) to Perform from Outperform.
UiPath came public last April at $56 a share, trading at high as $90 in May. But the stock has cratered since, setting a record closing low Wednesday at $35.26. “This is a case where UiPath as the [robotic process automation] market leader should benefit from a strong top-line driver with good business efficiency tools demand this year; at the same time, valuation risk has lessened considerably,” he writes. As for SAP, he says the company is “in good shape,” but sees “an uncertain transition to cloud computing and few visible near-term catalysts.”
More broadly, Schwartz advises investors to focus on companies with good growth that are trading at multiples of free cash flow below historic averages, pointing to
(CRM) as one example. He also likes “dominant market leaders” with stock prices off more than 50% that should actually benefit from higher rates—in that category he cites
(XM). And he also suggests seeking out recent software-as-a-service stocks trading at more than 40% discounts to their recent initial public offerings, pointing to
), in addition to UiPath.
“Themes that had been working so well, like digital transformation and vertical market software-as-a-service, have fallen apart as fears over a slowing spending environment and the impact of tighter fiscal conditions are devaluing growth,” he writes. “Nevertheless, strong secular growth trends amid falling valuation multiples and implied bad outcomes in 2022 provide good opportunities in software but also put a higher duty on selectivity.”
Schwartz cautions that the high-growth cloud software companies still look risky, even after the sharp recent selloff. “While we prefer investing with category leaders with sustainable runway over the long term, and some hypergrowth names are 60% off their highs, the fastest recurring revenue growers with limited or negative cash flow could experience further multiple degradation or measured multiple expansion in the face of moderating growth,” he writes.
UiPath stock on Thursday is up 7.2% to $37.81. Despite the downgrade, SAP American depositary receipts are up 2% to $139.48.
Write to Eric J. Savitz at [email protected]