If 1967 was the Summer of Love, 2020 is the Summer of Software. Software stocks are rising as they never have before. That’s thanks to the novel coronavirus and work-from-home trends. Plus, nothing else in the stock market seems to be working.
It’s as simple as one, two, three:
- The pandemic crashed the market. It kept down travel stocks, manufacturers, retailers and transportation companies.
- Everyone who possibly can is working from home, putting enormous pressure on companies to support them and maintain security.
- After the Federal Reserve supported the market with trillions of dollars in new money, that money needed a return. Stocks provided what bonds couldn’t, and software companies were making money.
Many of the gains are driven by the cloud. Clouds, the networks of hyperscale data centers built by Microsoft, Google, Amazon (NASDAQ:AMZN), Apple (NASDAQ:AAPL) and Facebook (NASDAQ:FB), let software reach a global market instantly. The cloud delivers productivity and makes companies more efficient.
Software has compressed a decade of economic change in just a year. Commuters have disappeared, but online deliveries roll on. If you’re in these stocks, you’re making money even while the world seems to collapse around you.
Here are just some of the software stocks I have profiled recently at InvestorPlace:
- Adobe (NASDAQ:ADBE)
- Okta (NASDAQ:OKTA)
- Oracle (NYSE:ORCL)
- Slack (NYSE:WORK)
- Zoom Video Communications (NASDAQ:ZM)
Software Stocks: Adobe (ADBE)
Few companies illustrate the changes software can make quickly better than Adobe.
Adobe is one of Silicon Valley’s more venerable companies, its headquarters the center of San Jose. It was founded in 1982 around PostScript, online fonts enabling desktop publishing. It then grew by acquisition, buying companies involved in bringing photos, videos and documents online.
But it really took off in 2013, when the company committed to selling software by subscription, rather than as a product on disks. Over the last five years the shares are up 475%, and 2020 has seen a 40% gain.
This is giving some analysts nosebleeds. Adobe now sells for almost 20 times its 2019 revenue, which is growing just 10% in 2020. It sells for 60 times earnings and has no dividend. Yet 16 of the 22 analysts following it still say buy the stock. Some even have a price target higher than its current $460.
Despite its valuation, InvestorPlace Markets Analyst Luke Lango still sees Adobe as a long-term buy. With earnings per share growing at 34% per year, who is to argue?
When you go to the office, your badge shows who you are. When you sign into work, your network does too. But what happens when you work from home?
Okta was founded a decade ago by two Salesforce (NYSE:CRM) executives to solve that problem. It’s part of the newest trend in software — necessary infrastructure that lives only in the cloud.
Okta’s software provides identity management. It creates what are called federated identities, single sign-ons that work on multiple systems. It’s also built with open-source software and an open standard. This allows for rapid implementation and embeds Okta deep into the way clients do business.
In 2020, the rush to Okta has taken the stock to unfathomable new heights. At $214, a market capitalization of $27 billion, it now sells for 46 times its fiscal 2020 revenue of $586 million. It is not yet profitable, but none of the 16 analysts following it are advising a sell.
InvestorPlace’s Will Ashworth recently profiled Okta as one of “10 Innovative Stocks to Buy in the New Normal” and should the share price falter, you should follow his advice and buy.
Software Stocks: Oracle (ORCL)
Oracle missed the two main technology trends of the 21st century, the cloud and open-source software. Yet the stock is still up nearly 10% in 2020.
Oracle was founded in 1977, and its relational database technology was the big trend of the 2000s. But applications built with it, like that of Salesforce, began moving to the cloud in the 2010s. Oracle resisted the trend. Oracle also resisted the trend to open source, in which development costs are shared, even after Microsoft accepted it. As a result, Microsoft is now worth ten times Oracle.
But all is forgiven in today’s market, especially when you can still deliver big numbers. For the fiscal year ending in May, Oracle reported net income of over $10 billion on revenue of $39 billion. It paid 96 cents per share of dividends, up from 60 cents just five years ago.
Among software stocks, Oracle is a relative bargain. It has a market cap of $177 billion, which is just 18 times last year’s earnings. The company ended the year with over $37 billion in cash. Founder Larry Ellison, who still holds the position of chief technology officer, is the world’s fifth wealthiest person. The company continues to buy back stock, and its share count is now down 25% over the last five years.
The stock is cheap because the company isn’t growing. While its earnings release highlights “Fusion cloud” revenue gains, much of its money still comes from corporate data centers, which are fading away. Its customers are mostly large enterprises and governments, for whom switching technology is prohibitively expensive. It’s still bleeding market share.
Still, for conservative investors, Oracle is a safe bet among software stocks. None of the 20 analysts following it at TipRanks say sell. It’s a favorite among institutions, a good place to store money while waiting for opportunity elsewhere.
You’re still getting that 10% annual return, still getting that dividend and Oracle isn’t going away.
Slack was one of the first work-from-home stocks to come up short of expectations in June. But its shares are still up 60% so far in 2020.
Slack was built on a chat application, but it’s now a complete social network for coworkers. It organizes worker conversations, it supports all type of media including video and competes directly with Google and Microsoft for large corporate contracts.
That’s where the concern lies. On June 4, the company reported first-quarter revenue of $202 million, up 50% year-over-year. But analysts expressed concern over the company’s cash-strapped customers. Net losses continue to widen, and management couldn’t say when its net losses might end.
Shares have since recovered from the earnings crisis, entering trade July 13 at about $35. That’s a market cap of $20 billion, which should be about 20 times fiscal 2021 revenues. It’s still not cheap.
Analysts now wonder how long Slack can keep growing against its well-heeled competitors. Two of the 18 following it even have it rated as a sell. The average price target is close to its current selling price.
The Slack story illustrates what can happen to high-flying software stocks that seem like they might disappoint. CEO Stewart Butterfield admits he’s worried. While clients have rushed to Slack to cut costs, the economy has fallen off a cliff. Software can’t run an economy that doesn’t exist.
Software Stocks: Zoom Video Communications (ZM)
No company better represents the meaning of 2020 than Zoom Video Communications.
Zoom offers video conferencing as a standalone service. The idea has been around for decades, with companies like Cisco Systems (NASDAQ:CSCO) offering spacious, tech-filled rooms for remote conferences in the 2000s. But Zoom made it simple, with a free option, and software anyone could download.
Zoom went public only in April 2019. The first day’s trade left it at $68. Since then it is up 345%, opening July 13 at about $278, a market cap of $78 billion.
During the pandemic, Zoom has managed to become a verb. People understand what it is to “zoom,” just as they learned a decade ago to “google.” That’s a powerful advantage, even with well-heeled competitors like Cisco, Microsoft and Google on its tail.
Synergy Research, which follows cloud companies, calls Zoom a video-as-a-service company, because it’s a standalone product, in contrast to software-as-a-service competitors. In the first quarter, the entire videoconferencing market’s growth went to Zoom, with revenue up 148% year over year. The market was already trending toward video, said Synergy founder Jeremy Duke. But the pandemic “turbo-charged the trend.”
If you were lucky enough to get into this stock, you have the delicious choice of taking profits or letting it ride. Remember, you don’t have a profit until you sell and get cash in your hand. If I were in that position, I’d take a little off the table, and let other investors in. Until competitors adapt, Zoom looks set to continue zooming.
Dana Blankenhorn has been a financial and technology journalist since 1978. His latest book is Technology’s Big Bang: Yesterday, Today and Tomorrow with Moore’s Law, essays on technology available at the Amazon Kindle store. Follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, MSFT, AAPL and FB.