The tech sector is a powerful engine in today’s economy, driving jobs and innovation, profits and returns. And it’s no wonder why – tech is the key to the modern world, changing our lives and informing all that we do. Yes, the economy still runs on oil and coal, but digital technology has impacted all of us, whether we work in factories or offices or watch the kids at home.
All of these factors make software companies a natural place for investors to look when they seek stocks with high return potential. If high tech is the key to modern life, then software is the key to high tech. Software companies create the code and programs that let us maneuver in the digital world, from messenger apps to word processing and facial recognition.
Investment banking firm Needham recently released a report, outlining its software picks from the firm’s analysts. Collectively, Needham’s analysts have a 61% success rate on their stock recommendations according to TipRanks – so we’ve looked into their report to find three stocks that appear particularly compelling.
Our first step was to run those tickers through TipRanks’ Stock Comparison tool, a powerful set of filters that allow prospective investors to locate stocks and view their vital stats side by side. Here are the results:
We can see that each pick shows a variety of strengths and weaknesses. Let’s take a closer look and find out what Needham’s analysts have to say.
Crowdstrike Holdings, Inc. (CRWD)
Cybersecurity has emerged as a growing niche in the digital economy. From online banking to personal emails, we all have a clear interest in keeping our online activities safe – and private. Crowdstrike works in this niche. The Silicon Valley company provides threat intelligence, endpoint security, and cyberattack response services for online clients.
In its most recent earnings release, for fiscal Q3 2020, reported last month, the company posted better than expected results. Like many new tech companies, Crowdstrike is operating at a net loss – but that net loss was only 7 cents per share rather than the forecasted 11 cents. Quarterly revenue came in at $125.1 million, 5.3% better than expected.
Investor sentiment on this stock has been resoundingly positive. Based on a sample of over 45,000 portfolios, individual investors have been adding CRWD shares in both the last 7 and the last 30 days. Additionally, financial bloggers are bullish, with CRWD receiving favorable coverage 76% of the time, compared to 61% on average in the tech sector.
Needham’s Alex Henderson makes Crowdstrike his ‘Single Best Idea’ in cybersecurity for the coming year, and adds it to his firm’s Conviction List. He writes, “Crowd has the right technology to improve security for either legacy perimeter defense-built security postures or for emerging, superior, zero-trust, cloud-direct security. From an externality perspective we see a surprisingly low risk environment for CrowdStrike. While legacy players are falling away, opening major share opportunities for Crowd, we focus more on Crowd’s ability to execute.”
Henderson gives the stock a $92 price target, suggesting a 45% upside growth potential, and a Buy rating. (To watch Henderson’s track record, click here)
Overall, CRWD shares get a Moderate Buy from the analyst consensus, based on 7 Buy ratings and 6 Holds. The stock sells for $63.45, and the average price target of $72.58 implies upside potential of 14%. (See Crowdstrike price targets and analyst ratings on TipRanks)
Medallia, Inc. (MDLA)
Number two on our list today is Medallia, a cloud-based SaaS customer experience management company from San Francisco. Medallia has a global reach, with offices in New York, Washington DC, London, Paris, Buenos Aires, Tel Aviv, and Sydney. The company’s products meet B2B needs in the high-tech, hospitality, financial services, and retail sectors.
Like Crowdstrike, Medallia inhabits a profitable niche. The company’s quarterly revenues and earnings, reported in December, were ahead of the estimates. Revenues beat by 7% and came in at $103.1 million; EPS was a net loss, but only 1 cent per share against the 3 cents prediction.
Scott Berg, 5-star analyst, added MDLA to Needham’s Conviction List, and calls the stock his top pick for 2020. He says in his comments, “A fast-growing end market, ramping sales investments, and an expanded GTM strategy taking hold are the key factors behind our thesis. With proper execution from a still-new management team, we believe MDLA will exit CY20 with accelerating revenue growth and cross the profitability chasm; these tend to be characteristics of stocks that outperform in our universe.”
Berg put a Buy rating on the stock and gave it a $45 price target, implying 42% upside potential from current trading levels.
Medallia has 4 recent reviews, 3 Buys and 1 Hold, giving the stock an analyst consensus view of Strong Buy. The $44.25 average price target suggests an upside potential of 39% from the current share price of $31.77.
Talend SA (TLND)
The cloud and software-as-a-service subscription products have made waves in the software tech industry, but proprietary systems are only one path to profit. Open source software and integration systems are related niches ripe for exploitation. Talend SA develops data integration software to ease the process of owning open source platforms. The company’s customers use the products to simplify development, learning, and cost of ownership involved in using open platforms.
Like the stocks above, Talend has been delivering rising quarterly results. While running at a net loss, it is trimming that loss – in Q3 2019, the company beat the EPS expectation by 15 cents – reporting a loss of 8 cents against the consensus estimate of 23 cents. Revenues showed a modest beat, landing at $62.6 million – but that number was an impressive 20% gain year-over-year.
This stock was reviewed for Needham by Jack Andrews, a 5-star analyst ranked in the top 3% of the TipRanks database. Andrews was impressed with the company’s “strong secular tailwinds,” and made it his Top Pick for the coming year. He wrote, “There are 5 reasons why we are positive: 1) Pending disclosures on the cloud business should provide visibility and improve sentiment; 2) Migrations from on-premise to the cloud should result in upsell opportunities; 3) Leverage to rapid growth of cloud data warehouses; 4) FX headwinds should abate; and 5) Discounted valuation creates a favorable risk/reward setup.”
Andrews backs his Buy rating with a $65 price target, indicating his confidence in an eye-opening 63% upside potential.
Talend’s two most recent reviews are Buys, giving the stock a Moderate Buy consensus rating. Shares show a very high upside potential – the current price is $39.80, while the average price target of $60.50 suggests that there’s room for 52% growth in the next 12 months.
