The ongoing tumult in the stock market put the skids on the long bull run fuelled by accommodative monetary policy. The S&P 500 and the NASDAQ have slumped nearly 14% and 25% respectively for the year to date, as of May 06, as untamed inflation forced the Fed to take away the punchbowl.
A broader equity market selloff, resultantly, opened many attractive entry points for value investors as stocks tumble from their peaks. Many of these stocks can be found in Morningstar’s robust equity research coverage universe that has nearly 99% of the firms in the S&P 500 index.
Those looking beyond the blue-chip Big Tech names may want to look at the following players in the software application industry. Despite the current weakness in their valuations, they are expected to remain market leaders in their fields.
DocuSign (DOCU) offers the Agreement Cloud, a broad cloud-based software suite that enables users to automate the agreement process and provide legally binding e-signatures from nearly any device.
As the leader in electronic signatures and contract life cycle management software, DocuSign has a long runway for growth through viral adoption in a market that has never been commercially exploited. “The firm’s vision is to modernize the contracting process by taking it from a disjointed and paper-based manual steps to an automated digital and collaborative system,” says a Morningstar equity report.
However, there’s more to DocuSign than just e-signatures. The firm’s cloud software, Agreement Cloud, includes tools to help users prepare contracts using intuitive drag and drop forms, negotiate, a variety of enhanced security and identification means, automate agreement workflows for satisfying contract elements post-execution, allow for payment collections, and centralize account management.
“We also see existing customers adopting more use cases and expanding seats [people with access to the system] over time, and also moving to the Agreement Cloud platform,” says Morningstar equity analyst Dan Romanoff who puts the stock’s fair value at US$130, incorporating enterprise value/sales multiple of 10 times and a 2% free cash flow yield.
Strong adoption has garnered more than one million paid customers and hundreds of customers already driving annual contract value in excess of US$300,000 annually.
“Management estimates that DocuSign has a total addressable market of US$50 billion, half of which is e-signatures alone, while Agreement Cloud is the next largest piece, with other services making up a smaller opportunity,” says Romanoff.
Salesforce Inc (CRM) offers enterprise cloud computing solutions, including Sales Cloud, the company's main customer relationship management software-as-a-service product. It also offers Service Cloud for customer support, Marketing Cloud for digital marketing campaigns, Commerce Cloud as an e-commerce engine, the Salesforce Platform, which allows enterprises to build applications, and other solutions.
“We believe Salesforce.com represents one of best long-term growth stories in software,” says a Morningstar equity report, stressing that ongoing margin expansion should continue to compound earnings growth of more than 20% annually for much longer, even as revenue growth could dip below 20% for the first time at some point in the next several years.
After introducing the software-as-a-service model to the world, Salesforce.com has created a front-office empire that it can build on for years to come. “Salesforce.com’s critical differentiator was that the software was accessed through a web browser and delivered over the Internet, thus inventing the SaaS software delivery model,” says Romanoff who puts the stock’s fair value at US$320, implying 2023 enterprise value/sales multiple of 10 times, and a 2% free cash flow yield.
Salesforce.com remains the clear leader in salesforce automation (Sales Cloud) where it has gone from no product to 33% market share over the last 20 years. “Customers and industry observers alike view Salesforce as the clear front-runner in a category that increases the productivity of sales representatives,” says Romanoff.
Salesforce’s wide economic moat, or sustainable competitive advantage, stems primarily from switching costs, with support from a network effect.
Coupa Software (COUP) is a cloud-based provider of business spend management (BSM), solutions. It allows firms to monitor, control, and analyze expenditures to lower costs and improve operational efficiency.
With a platform of over 2,500 businesses and over 7 million suppliers, Coupa has built a robust self-reinforcing ecosystem of AI-informed spend management. A Morningstar equity report forecasts “Coupa has a long growth runway ahead as it continues to make strategic investments to expand its platform and spend management use-cases.”
Coupa has been able to expand its market reach significantly as back-office digital transformations are accelerating and Coupa remains the market-leading cloud BSM vendor. “We expect Coupa’s partners to increasingly advance Coupa’s adoption throughout businesses as they guide their clients through digital transformation initiatives,” asserts Morningstar equity analyst Victoria Radke.
The firm has invested heavily to bulk up its platform into a more holistic spend management tool. “As the firm introduces new modules, it will benefit from alignment with a larger number of spend use-cases, greater suite synergies, and more cross-selling opportunities,” says Radke, who pegs the stock’s fair value at US$120, projecting a five-year compound annual growth rate of 23% through 2027.
Moreover, a growing community will reinforce Coupa’s AI-based community intelligence offering. The company’s AI capabilities are best-in-class, with other players not providing the same breadth and depth of analytics from a spend and operational efficiency perspective. “As a result, Coupa will be able to maintain its leadership position in this space,” notes Radke.
