Enterprise software stocks won’t be immune to a recession, analyst warns

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Signs that it’s taking longer to close software deals have started to appear.

The time of dreams

A recession is coming. Enterprise software stocks will feel the pain.

The optimistic view, as Piper Sandler analyst Brent Bracelin puts it in a Monday research note, is that software-as-a-subscription companies with recurring revenue models, high gross margins and “tailwinds seculars” related to cloud and digital transformation should be well positioned to weather the developing economic storm.

But he notes that the sector is not immune to a recession. During the financial crisis of 2008 and 2009, he notes, the combined growth rates of

Selling power

(symbol: CRM), NetSuite (now owned by

Oracle

) and Concur (now owned by SAP) fell to 14% from 49%.

Bracelin cut its second-half 2022 and 2023 financial guidance for 28 enterprise software stocks to account for more intense currency headwinds and heightened global economic risk. He cut his share price targets across the group.

Evidence of trouble is mounting. Bracelin points out that the German enterprise software company

Software SA

last week cut its full-year bookings growth forecast to 15% from 20%, warning it will take longer to close deals in the current environment.

ServiceNow

CEO Bill McDermott recently warned that for his company, the sales cycle is getting longer in Europe and “macro crosswinds are blowing hard.”

For Salesforce, Bracelin’s new stock price target is $220, up from $250 previously. For

Shopify

(SHOP), he lowered his figure to $38 from $60. And for Workday (WDAY), its new target is $175, down from $230 previously. He cut off his call to

Qualtrics

(XM), which reports financial results this week, came in at $20, down from $40. For

Coupa Software

(COUP), its target went from $85 to $65.

It made similar cuts to the rest of the businesses it covers, lowering its 2023 sales growth forecast by an average of 21%. Its stock price targets have fallen by an average of 26%.

On the positive side, Bracelin noted that cloud software stocks are already down 52% on average since November, pointing out that software stocks historically bottomed out four to 10 months before company fundamentals hit the bottom. bottom.

The next earnings period “will be tough for software as growth patterns are reset,” but stocks could become more attractive after that, Bracelin said.

Write to Eric J. Savitz at eric.savitz@barrons.com