The software stocks to own in 2024, according to Bernstein

Looking to 2024, Bernstein thinks the performance of software vendors and their stocks will be driven by sector, segment, and company fundamentals, as compared to last year, which had a strong macro driver. This does not mean that macro is going away, as it is going to continue to be a factor, but software is lapping the headwinds seen last year, according to the firm, which is most optimistic about Microsoft (MSFT), Oracle (ORCL), SAP (SAP), and Adobe (ADBE).

2024 OUTLOOK: Bernstein’s view for in 2024 is based on the expectations for only modest acceleration in IT spend growth and possibly softer growth in Software segment growth; the macro environment remaining stable; and extraordinary measures from 2023 having limited benefit in 2024.

The firm thinks that the factors/drivers that affect the software vendors performance in 2024 include easier comps which will benefit some vendors like Snowflake (SNOW), MongoDB (MDB), Salesforce (CRM); AI revenue may remain a big narrative driver but a small revenue generator for 2024, even for leaders like Microsoft and Adobe; on-premise to Cloud migration should pick-up; segment and company specific dynamics could be a meaningful differentiation; 5) and multiples that have rebounded in late 2023, changing the risk/reward profile for many names.

TOP IDEAS: Bernstein is most optimistic about Microsoft, Oracle, SAP, and Adobe, with the long-term AI story for Microsoft the biggest and best in tech. The firm also really likes Workday (WDAY) as subscription revenue growth is likely to incrementally increase and GAAP and PF margins are going to naturally move up. Additionally, Bernstein thinks Snowflake and MongoDB could benefit from consumption demand improvement and easier comps. Although it still thinks that the current set-up looks better for Snowflake than MongoDB, the firm continues to be concerned in the longer term as to Snowflake’s ability to sustain growth.

Further, the firm observes that Salesforce also has easier comps from sluggish growth in 2023, and Bernstein is cautious that the large revenue base and company specific challenges could make it difficult for the company to meaningfully accelerate growth in 2024 and possibly thereafter. While Salesforce will get a tailwind from the cost cuts in 2023, at the back first half of the year margin improvement is going to be difficult and likely painful, especially given the need to invest in AI to compete against Microsoft and others, the firm adds.

TARGET CHANGES: Bernstein raised the price targets for Underperform-rated Salesforce to $212 from $159, Market Perform-rated Snowflake to $191 from $160, and Market Perform-rated Splunk (SPLK) to $152 from $114.