Focus on Wide-Moat Firms Throughout Software Carnage
We now see an opportunity for investors to trade up into several high-quality stocks.
|Editor’s note: Read the latest on how the coronavirus is rattling the markets and what investors can do to navigate it.|
Concerns over the spreading coronavirus (COVID-19) and oil production have sent the equity market into a tailspin and led to a sell-off across our software coverage, similar to the 20% correction in the broader market. Before the sell-off, we saw limited opportunities for upside based solely on valuation. However, we now see an opportunity for investors to trade up into several high-quality stocks and urge investors not to throw in the towel. We highlight Microsoft (MSFT), ServiceNow (NOW), Salesforce (CRM), and Tyler Technologies (TYL), all of which are wide-moat rated and float to the top of our list. Our thesis on each name remains unchanged and we are maintaining our fair value estimates for Microsoft of $185; ServiceNow of $370, Salesforce of $202; and Tyler of $322. Of these four names, Microsoft is the most likely to be impacted, particularly by COVID-19, as the firm has already pre-announced that it does not expect to hit its revenue guidance for the quarter because of supply chain issues in China. We highlight Tyler here for its insulated revenues that ultimately are derived from property taxes levied by local governments, which never seem to go down.
Despite the Microsoft announcement, which we estimate could have an impact of several percent on revenues, companies under our coverage that have reported in the last two weeks, including Salesforce, Ansys, Guidewire, and Zoom, have generally downplayed the impact the outbreak was having. We estimate companies under our coverage generate inconsequential revenues from China, which is ground zero for COVID-19. Admittedly, the quarantine within Italy, as well as the collapse in oil prices, represent new information that came after these companies reported. However, at this point, we do not think these new concerns warrant the sell-off that we have witnessed in the aforementioned wide-moat names. We are monitoring the situation closely and recognize that developing information could change our opinion.
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Dan Romanoff does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.