Citi names Microsoft a leading choice, states sell-off in software application stocks is mainly done
Citi believes the worst of this year’s sell-off in software application names might remain in the past, leading it to upgrade its leading choices. The company included Microsoft to the top of its list, keeping in mind that it is among the stocks most exposed to “still resilient IT budgets” and has “defensive hybrid apps/infra characteristics.” Analyst Tyler Radke likewise stated the company has high conviction in Microsoft’s “sustained double digit growth,” led by momentum in its business cloud organization, and long-lasting prices power. “Software has experienced a brutal start to 2022 with the IGV index down 30% year-to-date and hypergrowth multiples pulling back about 70% well below pre-pandemic levels,” Radke stated. “With valuation multiples near multi-year lows, we believe the sector de-rating is mostly done, especially with Citi’s 10-year interest rate Dec-31 forecast for 2.75% (vs. 3.1% current).” He likewise stated evaluations are back to multiyear lows, which might cause approximate cuts in the 2nd half of the year. “Software valuation multiples relative to the S & P 500 and in hypergrowth have fallen to multi-year lows and have come as 10-year interest rates have risen dramatically. We believe the worst is over, but there could be increased volatility through risks to estimates, with a weaker macro backdrop and tough comps in 2H,” Radke stated. Microsoft is buy ranked by Citi, with a rate target of $364, which is more than 40% from where the shares closed on Thursday. —CNBC’s Michael Bloom contributed reporting.
