Goldman Sachs Says Buy Massive Software Weakness Now: 4 Top Stock Picks

Goldman Sachs Says Buy Massive Software Weakness Now: 4 Top Stock Picks

December 21, 2021

In just a blink of an eye, the software stocks have been hammered. Some of the top stocks actually have fallen back enough to become very attractive for growth stock investors with a somewhat higher risk tolerance. While the overall risk-off movements of the past week or so are largely attributed to the spike in Omicron cases, the software stocks have been hit hard even while posting very solid results and reasonable forward guidance.

A new research report from the software team at Goldman Sachs makes the case that some of the top stocks in the sector, which are entering a seasonally strong time, are offering very solid entry points and value at current trading levels. The report said this about current valuations:

The recent software correction of 27% of Enterprise Value/ Sales in a short time span is consistent with prior corrections, which have historically averaged a peak/trough drawdown of 29%, and implies that the group is oversold in the near term. This recent correction is particularly relevant going into the seasonally strongest quarter, where we expect strong software results. Moreover, some companies have already provided positive 2022 guidance with upward bias to street expectations, thereby affirming strong software fundamentals.

The analysts are very positive on nine top software stocks and here we highlight four of the sector giants. While all are rated Buy at Goldman Sachs, it is important to remember that no single analyst report should be used as a sole basis for any buying or selling decision.

Adobe Systems

Shares of this high-profile legacy software company have really backed up some in price and are offering investors a solid entry point. Adobe Systems Inc. (NASDAQ: ADBE) operates in three segments: Digital Media, Digital Marketing and Print and Publishing. The Digital Media segment provides tools and solutions that enable individuals, small and medium businesses, and enterprises to create, publish, promote and monetize their digital content.

Top Wall Street analysts see the company benefiting from artificial intelligence, predictive analytics, automation bots, speech recognition and natural language processing and image recognition. Flagship products include Creative Suite, Photoshop, Acrobat, Premiere, Dreamweaver, Illustrator, InDesign and LiveCycle. PDF and flash technologies from the company have become industry standards and act as a platform for other Adobe products.

Goldman Sachs said this about Adobe:

Our thesis is that Adobe remains firmly a growth company. Adobe is a market leading franchise with a dominant position and pricing power in its core Creative market, which is poised to grow its subscribers mid-teens driven by Digital Transformation initiatives. This leaves us with potentially several years of durable double-digit revenue, earnings, and cash flow growth. Adobe is on a path to grow revenues by 2x to 3x from current levels over the next few years, potentially entering the top ranks of software companies with $40 billion+ of revenues. Adobe’s franchise stands out as one with a loyal and growing customer base, which consider the brand to be the default tool of their profession despite several attempts by large and small competitors to change the game.

The Goldman Sachs price target for Adobe Systems is $710. The consensus analyst target is $679.76, and the closing price on Monday was $549.77 a share.

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