Goldman Sachs Sees a Recovery for These 2 Software Stocks

It’s no secret many tech stocks have had a torrid time navigating 2022’s bear with many down significantly for the year. However, heading into 2023, Goldman Sachs’ Kash Rangan thinks a recovery could be in the cards for beaten-down software stocks.

‘Software stocks in our coverage underperformed the NASDAQ significantly in 2022,’ said Rangan, who goes on to outline why tech – and software in particular – is primed to push ahead when the bear turns toward recovery: “With the contraction in software multiples in-line with 2008 levels, we see a compelling case for buying into the sector as the group has stronger fundamentals and healthy secular tailwinds.”

In fact, with the sector now “oversold,” and many of the stocks under Goldman’s coverage trading at a “discount to their intrinsic value,” Rangan sees this as a “buying opportunity for many of our high-quality SaaS names.”

So let’s follow Rangan’s lead, and take a look at some of those buying opportunities. We’ve found two software stocks that the analyst likes, and used the TipRanks platform to check out the latest data on both; these are Buy-rated equities, and they both show sound upside potential for the coming year. Is a recovery in store them? Check out what the data – and analyst Rangan – have to say about that.

MongoDB, Inc. (MDB)

First up is MongoDB, a database software provider. MongoDB is a developer data platform, with the tools and services needed to facilitate the creation, transformation, and disruption of industries through the power of data. The New York-based company boasts over 39,000 customers across 100 countries worldwide. Its database platform has been downloaded more than 325 million times, and the company has seen over 1.5 million customer registrations for its MongoDB University certification courses, all making MongoDB one of the world-leaders in database platform development.

The company’s revenues have been showing consistent quarter-over-quarter gains for several years. In the last reported quarter, 3Q22, the company showed a top line of $333.6 million, for a gain of nearly 9% sequentially – and an impressive 47% year-over-year. That solid gain was powered by a 26% y/y gain in total customer numbers – and a hefty 61% y/y increase in revenue from the company’s flagship cloud product, Atlas. At the bottom line, MongoDB brought a pleasant surprise for investors, as the non-GAAP diluted EPS came in at 23 cents, far ahead of the 17-cent loss expected – and nearly 8x higher than the 3-cent value recorded in the year-ago quarter.

So, MongoDB holds a rock-solid position in a vital niche, but even so, the shares are down by 63% this year, almost double the 33% loss of the NASDAQ, as the stock has been unable to withstand the bearish trends amidst fears earlier in the year of slowing growth for the company.

However, Rangan lays out the bullish case for the company. “As we look past potential consumption volatility in the near-term, we reiterate our view that MongoDB is uniquely positioned to capture outsized share of one of the largest/most strategic TAMs in software (+14% CAGR to reach >$120bn in CY26, per IDC) due to an inflection in the database market towards cloud/NoSQL (to which Atlas is firmly levered), potentially supporting $10bn in revenue longer-term,” the analyst explained. “We point to the strength of MongoDB’s leading indicators, including +2,000 TTM direct customer adds vs. +1,100 in the prior year Q, which is the primary indicator for longer-term revenue growth as these customers deploy new workloads on MongoDB’s platform.”

These comments provide solid support for the analyst’s Buy rating on the stock, while his $325 price target implies a robust 64% potential gain by the end of 2023. (To watch Rangan’s track record, click here.)

Mongo DB has attracted plenty of notice from the Street, in the form of 21 recent analyst reviews that include 17 Buys and 4 Holds for a Strong Buy consensus rating. With an average price target of $255.65 and a trading price of $197.47, the stock boasts a 29% potential gain on the one-year time horizon. (See MongoDB’s stock forecast at TipRanks.)

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Snowflake (SNOW)

The second stock we’re looking at, Snowflake, is another data cloud provider, offering a public service that allows organizations to pool resources and benefit from nearly unlimited scale and performance. Snowflake’s Data Cloud offers a seamless experience for users around the world, no matter their location. Looking at Snowflake by the numbers, we find it has over 7,200 customers (including 287 million-dollar-plus customers) and more than $3 billion in the work backlog. Overall, Snowflake’s Data Cloud manages more than 250 petabytes of data.

A look at the quarter ended on October 31 this year, Q3 of fiscal year ’23, shows the company’s underlying strength. The quarterly revenue of $522.8 million was up 67% y/y, while the $3 billion in backlogged work gives both a sound indication of future business – and represents growth of 66% from the year-ago quarter. The company has a net revenue retention rate of 165%, indicating a base of satisfied customers.

At the bottom line, Snowflake clobbered expectations with a non-GAAP net income of 11 cents per diluted share. This was nearly 4x the 3-cents reported in fiscal 3Q22 one year ago – and it was more than double the 5-cent forecast.

The stock, however, has showed a similar pattern to other names in the sector; concerns around the inflationary environment and growth against a backdrop of economic uncertainty have seen tech stocks go out of favor, and as such, the shares have shed 59% of their value this year.

However, assessing Snowflake’s prospects, Rangan takes a strong bullish position, seeing the company’s combination of current depressed share price and solid business success as the cornerstone of a strong foundation going forward. He writes, “Snowflake is uniquely positioned to an economic recovery due to the consumption orientation of its business model, along with its exposure to multiple secular tailwinds, including cloud migration/digital transformation and enterprises’ increasing prioritization of data-driven operations to enhance business processes…. We believe Snowflake’s still best-in-class revenue growth and commitment to FCF margin expansion makes it a prime candidate for our recovery framework.”

The analyst quantifies this outlook with a Buy rating and a $200 price target that implies a 44% upside potential for the year ahead.

Looking at the ratings breakdown, based on 17 Buys against 7 Holds, the analyst consensus rates this stock a Moderate Buy. The shares are selling for $138.49 and have an average price target of $187, indicating potential for 35% upside in the next 12 months. (See Snowflake’s stock forecast at TipRanks.)

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.