Continued Assault on the Software Sector
Eric Savitz
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The Street’s assault on the software sector continues unabated. Thomas Weisel Partners analyst Tim Klasell this morning downgraded the infrastructure software sector to Neutral from Favorable, slashing estimate on a host of companies in the progress,
Companies affected by his estimate reductions include Akamai (AKAM), BMC Software (BMC), Citrix (CTXS), CommVault (CVLT), Digital River (DRIV), Double-Take (DBTK), McAfee (MFE), Microsoft (MSFT), Oracle (ORCL), Quest Software (QSFT), Red Hat (RHT), Symantec (SYMC), Tibco (TIBX) and VMware (VMW). He also reduced price targets of most of those companies.
“Despite the group trading below its historical premium to the S&P, our recent checks are indicating that the broader slowdown in the economy is catching up to software spending,” he writes. “With a lack of near-term catalysts to offset this weakness, we think the next couple quarters are unlikely to trigger a return to historical premiums. We think this group, which is a lagging group in tech, will not outperform over the next twelve months.”
Klasell says his checks indicate weakening in software spending. “In September, we observed a noticeable change in tone from a number of our industry contacts and we believe many software vendors and their channel partners will be stretching to make their numbers this quarter,” he writes. “Looking into the seasonally strong Q4, we would not be surprised to see the typical hockey stick replaced with a croquet mallet – namely, end-of-year budget flushes may not be as strong as in prior years, especially among vendors whose implementations are strained by a lack of available financing.”
Klasell does note that software stocks now trade at parity with the S&P 500 on a forward 12-month P/E basis, a discount to their historic premium of 1.5x since 2002, and longer-term, he thinks they can regain their premium.
Citing concerns about the softening macro economy and ongoing market volatility, UBS software analyst Heather Bellini this morning cautioned that estimates for the sector “need to come down materially” for the second half and for 2009. She also asks whether software companies that typically provide guidance for the year ahead will continue the practice given the lack of visibility - and she cautions that foreign exchange, which has been a tailwind for the stocks for the last 8 quarters, will provide a headwind in the fourth quarter and into next year.
Bellini today cut her ratings on four stocks:
- Adobe (ADBE): To Sell from Neutral.
- Intuit (INTU): To Sell from Neutral.
- Salesforce.com (CRM): To Sell from Buy.
- Synamtec (SYMC): To Neutral from Buy.
Bellini notes that she also is reducing estimates “on virtually every company in our coverage universe both for the remainder of 2008 as well as for 2009.”
Bellini’s only remaining Buy recommendations are Oracle (ORCL), Microsoft (MSFT) and Novell (NOVL).
“The one constant in all of our channel conversations has been that there is practically no visibility right now and as such they themselves are setting very conservative targets for Q4,” Bellini writes. “We note that the last time visibility was this poor was back in 2001-2003, when many companies (not all) backed away from providing guidance.”
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