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<p>Software stocks underperformed the S&#038;P 500 in both 2021 and 2022. As a group, software stocks trailed the S&#038;P 500 by 15% in 2021 and 16% in 2022. Valuations fell by 63% last year.</p>
<p>Getting back on a solid footing will take more time, according to the Jefferies 2023 Software Playbook. Analysts Brent Thill and Joseph Gallo, and their team, see a mixed-to-negative first half of 2023, with a better second half thanks to an expected return to growth in 2024 after estimates are lowered and multiples have been reset. In other words, adjusting to the new, new normal.</p>
<p>Before we look at the ratings changes the firm released Thursday morning, here is a rundown of Jefferies’ top predictions. Among large-cap stocks, Microsoft, Intuit and Oracle get the nod. Fortinet and Okta are the top choices among security companies, while Splunk, Procore and DocuSign are mid-cap picks. PowerSchool is the lone small-cap pick at Jefferies, and Atlassian, Snowflake, DataDog and Cloudflare are the firm’s high-growth choices.</p>
<p>Here are the four upgrades and four downgrades Jefferies announced Thursday morning.</p>
<p>Oracle Corp. (NYSE: ORCL) was raised from Hold to Buy, and the price target increased from $90 to $105. The implied 2024 price-to-earnings per share (EPS) multiple was raised from 16 times to 19 times. The analysts believe Oracle is well-positioned in a tough IT environment as companies spend more on back-office software, which may result in organic growth in cloud computing. If cloud sales fail to materialize, Oracle’s on-premise software will benefit. Jefferies calls Oracle “one of our favorite value names from a tactical perspective.”</p>
<p>At a share price of around $84.00, the upside potential based on the new price target is 25%. Oracle’s 52-week trading range is $60.78 to $89.52.</p>
<p>Atlassian Corp. (NASDAQ: TEAM) also was raised from Hold to Buy, and its $150 price target was left unchanged. The implied 2024 price-to-revenue multiple was raised from 8.8 to 8.9. One of Jefferies’ high-growth picks, the firm claims that Atlassian has the “best fundamental business” in its coverage. The decline in the revenue multiple from the mid-teens to high single digits creates a buying opportunity. The analysts also like the company’s prospects for medium-term growth, a large total available market and large customers still on deck to migrate to the cloud, among other things.</p>
<p>The implied upside to the stock is about 22%, based on a trading price of around $123.00. The stock’s 52-week range is $113.86 to $352.92.</p>
<p>Check Point Software Technologies Inc. (NASDAQ: CHKP) gets a rating upgrade from Hold to Buy as well and a price target hike from $135 to $150. The implied price-to-calendar year 2023 free cash flow multiple was raised from 11.6 to 13.2. Check Point’s challenge, Jefferies believes, is to “meaningfully re-accelerate” revenue growth. The company “has historically struggled to put up meaningful revenue growth and bears questions whether it can meaningfully accelerate growth in the face of macro weakness.”</p>
<p>At a share price of around $127, the implied upside based on Jefferies’ new price target is 18.1%. The stock’s 52-week range is $107.54 to $149.62.</p>
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