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3 Software Stocks on Path to Recovery
Stock Analysis & Ideas

3 Software Stocks on Path to Recovery

You can’t ignore software stocks. In the increasingly digitally connected world, software is ubiquitous.

Interestingly, TipRanks’ top-rated technology stocks hold the second most number of Strong Buy ratings, among eight broad sectors.

Software Stocks in Hot Water

The recent string of events has kept technology stocks, including software stocks, under pressure. Concerns of inflation began late last year and increased this year. Software development and innovations require continued research and investment to stay relevant.

This, in turn, needs funding. If interest rates are high, it becomes difficult, or costlier for companies to raise funds for tech innovations.

As if inflationary concerns were not enough, the Russian invasion into Ukraine in February made things worse for these stocks, by pushing up oil and commodity prices and adding to inflation.

Hopes Up On SaaS

The recent interest rate hike did not lead to an exorbitant decline in tech stock prices, in fact, they showed recovery trends in the days following the Fed’s first hike.

This might have been because anticipation had already driven speculators away. The tech-heavy Nasdaq 100 (NDX) index has been on a rally since March 14.

Moreover, accelerated digital transformations across industries are expected to keep the demand for software stocks high in the coming months.

Also, the need for remote working and learning software is expected to continue to keep Software-as-a-Service (SaaS) demand high. Companies offering voice and video communication software stand to benefit most from this demand.

Research firm RBC Capital markets said that its own All-SaaS Index grew 16.4% in the past week.

“We continue to believe in general the software spending outlook for 2022 looks rather healthy/robust but investments/margin pressure remains in focus,” said RBC analyst Matthew Hedberg.

Other Upsides

Hedberg noted that constraints in the supply of various materials, which have persistently been a hindrance to the technology industry, have toned down considerably.

Moreover, the Russia-Ukraine war has given rise to various national security-threatening cyber breaches. Hedberg thinks that this has made everyone aware of the “importance of a layered approach to cyber-security.”

Stocks to Watch

Salesforce (NYSE: CRM): Customer relationship management software provider Salesforce enables organizations to automate critical operations, provide customer service and support solutions, and document management and business analytic.

The demand for its products and cloud-based solutions have spiked since the pandemic.

The company has a Strong Buy consensus rating, based on 24 Buys and four Holds. The average Salesforce price target is $303.19.

Asana (NYSE: ASAN): Workplace collaboration software company Asana is another stock gaining immensely from the rampant remote work culture.

The company, however, has remained unprofitable so far, and is not expected to generate profits for the next few fiscal years. Nonetheless, Asana is growing its revenue and gross margins remarkably, which makes us believe that it will successfully generate meaningful profits in a few years.

Possibly, once these tumultuous times are over and the market’s appetite for risk returns, Asana will be positioned well for significant growth.

The stock has a Moderate Buy consensus rating based on eight Buys, four Holds, and one Sell. The Asana stock price projections point to an average price target of $59.54.

Palo Alto Networks (NASDAQ: PANW): This cybersecurity stalwart is one of the rare technology stocks that has gained 6.1% year-to-date, and 78.5% in the past year, weathering the uncertainties that have gripped markets across the globe.

The company’s next-generation security products bring applications, user, and content visibility together in its hardware and software architecture.

Over the years, it has annexed various small businesses specializing in several niches within the cybersecurity space, growing into a cybersecurity giant.

In the highly charged month of February, while the world was grappling with COVID resurgences, inflationary pressures, and the impending Russian invasion into Ukraine, Palo Alto came up with key new offerings, including Nebula, a PAN-OS software update that thwarts zero-day attacks; Cortex XSIAM, an AI-driven security platform; and new innovations for its Prisma SASE security software.

The company is a Strong Buy according to Wall Street consensus, based on 19 Buys and two Holds. The average Palo Alto price target is $625.38.

Bottom Line

As the economy recovers, software stocks are expected to make a comeback, and reward patient growth investors.

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