Application software companies see opportunity in tough economy

ByLance T. Lee

Sep 3, 2022

green butterfly

The application software market is at risk of a recession in the technology sector, but there remain key opportunities for businesses in areas where business spending is seen to remain resilient in the months ahead.

It’s the analysts’ opinion of Citi, where analysts recently launched or reiterated coverage on nearly two dozen software companies considered to be demonstrating exceptional “quality” in the current economic environment.

“We favor names that could see increased demand priority, can generate a strong return on investment [return on investment] with fast recovery times, [and] a proven track record in sales execution,” Citi analyst Steven Enders said in a report on the brokerage firm’s new stance on applications software. term for quality, strong margin profiles and sustainable growth.

With such a view in mind, Enders said Citi’s “preferred opportunities” include buy ratings on the following companies:

  • Ceridian HCM Holding (CDAY), which is experiencing “mid-market growth” and “corporate expansion.”
  • Workiva (WK), due to its stability in major financial reporting and automation platforms.
  • intuitive (NASDAQ: INTU), which is showing resilience in part thanks to a recent price increase for its QuickBooks accounting products.
  • Instructure Holdings (INST), which Enders said enjoyed being the “best in class” name in educational technology with a stable base of elementary, primary and higher education customers.
  • Box (NYSE: BOX), due to having “transformed over the past two years following inconsistent performance” following its IPO.
  • Paycom (PAYC) software, which Enders says has established itself with a “differentiated automation and self-service” software offering.
  • (NASDAQ: MNDY), due to its “flexible and collaborative approach” to cloud-based enterprise software.
  • Coupa Software (NASDAQ:COUP), which, while seeing its expense management platform come under scrutiny, is likely to see “potential for [business] reacceleration” with new offers in the supply chain and supplier management.
  • Expensify (EXFY), due to an “attractive valuation” and opportunities in the small and medium-sized market.

Enders said a recent Citi survey of finance and human resource managers led the brokerage to believe that, even with the risks of a recession on people’s minds, “[We] found what we believe to be a more resilient [spending] environment than expected.”

Enders added that the market for what are sometimes referred to as “back-office software” businesses should continue to benefit from industry shifts towards more transitions to cloud-based business scenarios and the continued automation of several commercial services.

In addition to the companies that Enders said were Citi’s top picks, the brokerage firm also began covering Appian (APPN), Asana (ASAN), Blackline (BL) Dropbox (DBX), OpenText (OTEX), Paycor (PYCR), Paylocity (PCTY), Pegasystems (PEGA), Workday (WDAY), and Vertex (VERX), and maintained Smartsheet (SMAR) coverage with neutral ratings.

Last week, several cloud software stocks received a boost following an upbeat earnings report from Snowflake (SNOW) that suggested continued strength for the data warehousing market, in particular.

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