Tippapatt
The potential for rate cuts, a soft-landing scenario for the economy, and the return of front-office expenditure, put the software and software as a service (SaaS) group in a very positive stance to outperform, according to a Baird Equity Research Morning Report, published on Thursday.
Analysts said that the recent pullback at the start of 2024 has reset about 6.6x next twelve months revenue, which is slightly below the trailing 10-year average. In addition, profitability profiles for the subsector have improved with generative artificial intelligence as a likely driver.
Analyst Rob Oliver highlighted five reasons why Baird likes SaaS:
- The team sees a return to spending for software companies entering year three of slower deal activity. “Industry conversations suggest projects are in place and Gen AI is driving enthusiasm.”
- They expect to see improvements in the companies’ sales and marketing expenditure this year.
- 2024 will mark a return of strategic mergers and acquisitions in SaaS because of a tougher organic growth environment, better business conditions, improved balance sheets, and lower cost of capital, according to Baird analysts.
- Street consensus for 2024 estimates imply this year’s revenue growth to accelerate about 1-2% year-over-year.
- The industry showed “a consistent willingness to spend on GenAI solutions.”
These are the top picks for 2024:
- Freshworks Inc. (FRSH) - The stock and it multiple has potential to move higher in 2024. The stock is currently at about 6.5x 2025 EV/revenue.
- Sprout Social Inc. (SPT) - Analysts are “incredibly comfortable with their bullish thesis” about this stock.
- Tyler Technologies Inc. (TYL) - Competitive positioning, solid demand environment, and cross-sell opportunity.