Top software stocks to own in 2024, according to BTIG

Looking ahead to 2024, BTIG has tagged large-cap Tyler Technologies (TYL), mid-caps Five9 (FIVN) and Braze (BRZE), and small cap Sprout Social (SPT) as its 2024 Top Picks in Application Software as part of its broader “BTIG 2024 Software Outlook” report. In Security and Infrastructure, BTIG’s top 2024 selection is Okta (OKTA), followed by Zscaler (ZS).

2024 SEEN AS MORE CONSTRUCTIVE IN APPLICATION SOFTWARE:  Following a year of “relative performance” against depressed expectations in 2023, 2024 will likely be a “more constructive year” in the Application Software space, punctuated by recovery, stabilization, and a return to more steady-state operations, BTIG analysts write in a year-end sector note.

The firm has selected Tyler Technologies as its preferred stock among the large-cap names, forecasting margin expansion and increased free cash flow continuing to demonstrate the power of company’s platform. With cloud migrations set to accelerate further, Tyler’s data centers are projected to be shut down within two years, adding about $25M to the company’s cost-savings annually, the firm writes.

Among the mid-cap names, BTIG likes Five9 for its “very manageable expectations” and “best tech” in the industry. AI and Automation are the core drivers of near-term demand inflecting higher for Five9, and many of the company’s channel partners are seeing strong pipelines, with best-ever new sales levels expected next year, BTIG states.

Sales and marketing platforms Braze and Sprout Social rank directly behind Tyler and Five9 as both have produced strong performance over the second half of 2023, and there is now a slightly wider range of potential outcomes for these stocks, though while volatility could be amplified here, BTIG believes that the more risk-tolerant investors will still find “plenty of meat left on the bone” in BRZE and SPT.

BUDGET GROWTH TO DELIVER MORE CONSISTENT PERFORMANCE IN SECURITY/INFRASTRUCTURE:  Security and Infrastructure software companies were hamstrung by the low-single-digit budget growth rates in 2023, but that growth is set to accelerate to 5%-7% in 2024, BTIG tells investors in its sector note. Firewall side is just getting past the halfway point of a digestion period, but the inflection in demand for Secure Service Edge is seen continuing into 2024, while trends across identity and vulnerability management are expected to be relatively stable next year, the firm states.

BTIG names Okta as its Top Pick for 2024 in Security Software. The company is trying to get past the October disclosure of a security breach, and the stock offers the greatest potential to re-rate higher among any of its sector peers as Okta’s execution improves, BTIG writes. The firm also believes that Okta’s new products present the company with a tangible growth opportunity as they materialize over the next two years.

Zscaler follows Okta as the “Number 2 Pick” in the Security/Infrastructure group for BTIG. The analysts are positive on the “clear runway” for the company, which the firm sees as “the only public pure play on growth in the SSE, or security service edge, market. Zscaler’s new products are also “gaining momentum”, and while consensus estimates suggest that the company’s billings will grow 25% in FY24, under its upside scenario, BTIG contends that the company’s growth rate can reach as high as 32%.