Prudential analyst Brent Thill released a research note late yesterday with his crystal ball pronouncements for enterprise software in 2006. If he's right, let's just say no one is getting rich off this gang any time soon.
He has a few recommended picks: Adobe, Microsoft, Red Hat and dark horse, Wind River, which makes embedded software for devices. With the possible exception of Wind River, you could argue that those names have compelling stories, but not compelling entry prices. But for Thill at least, the prices are more attractive than those of SAP, Salesforce.com and Autodesk; three companies he likes but only if they get considerably cheaper. For the record, he's still bearish on Oracle, citing its poor two year performance of negative 8%. And he wants to see a lot more before he gets excited by nascent turnarounds at Novell and BEA Systems.
This seems to be the problem with software stocks: There are some real and exciting trends in Web Services, software as a service and open source but they are slow moving and with the exception of Salesforce.com and Red Hat there are few companies that directly benefit from them. Instead, there is a big group of companies having see-saw quarters, like Novell and BEA, as they try to overhaul their business models to take advantage of these sea-changes. They may yet pull it off in 2006, but it's a hard bet to make. Meanwhile you have solid businesses like Symantec and Oracle, but the results from their recent controversial merger bets are far from clear.
Then you've got the companies that are unquestionably doing well like Adobe, SAP, Salesforce, and Red Hat. With so few names in that category, the money has flooded in. Look at these four companies stocks over the last year. Often forgotten about Adobe appreciated 23%; giant SAP appreciated 10% and zippy new success stories Sales force and Red Hat were up 117% and 122% respectively. How much growth is left?
Oh, and judging from the record low number of software IPOs last year, there aren't a lot of promising young Turks coming up in the ranks. If Thill is right it’s looking like a blue year for software investors.