The cloud automation software stocks to own in 2024, according to Piper Sandler

Looking to 2024, Piper Sandler expects it to be an inflection year for AI spending across broader infrastructure and CCaaS AI software. While the IT spending environment may remain cautious through the first half of 2024, budgets could open up in the second half of the year, the firm says. Security appears poised for a strong year, while interest rates will impact both valuations and debt refinances.

Piper sees the best-positioned names as Arista Networks (ANET), Fastly (FSLY), Akamai Technologies (AKAM), Five9 (FIVN), Nutanix (NTNX) and Nice (NICE). The firm remains selective towards names with more resiliency underneath, catalysts, and favorable competitive landscapes, with its top-picks being Nutanix, Akamai, Nice and Five9.

AI TAILWIND: AI became the most talked about topic last year, though this will have a more direct impact on Piper’s names in 2024, with exposed vendors needing to show monetization, the firm says. While AI is a major tailwind for tech, Piper expects broad IT spending to remain cautious early in the year but potentially opening in the second half of the year. The clear AI winners within its coverage, the firm says, are Arista, Five9, Nice, and Samsara (IOT), with most of its universe having potential.

IT SPENDING: Overall IT spending environment may remain cautious through the first half of 2024, before budgets could open up in the second half of the year, Piper believes. Its recent CIO Survey points to Security, ITSM, Edge Computing, and Data Management as key infrastructure priorities, while CCaaS is the highest priority in Communication Software. The firm’s NRR analysis points to an average bottoming in the first half of 2024, with Piper seeing the most positive topline setups with Samsara, Fastly, Five9, Nutanix and CommVault Systems (CVLT).

INTEREST RATES: With the debate around rate cuts for 2024, the firm believes this could play a major role on its coverage. If interest rates move lower, Piper expect names like Cloudflare (NET), Samsara, and Fastly could outperform. But if rates “remain higher for longer,” the Value/”GARP” names like F5 (FFIV), Akamai, Nice, Cisco (CSCO), and CommVault could be better positioned, says the firm. Additionally, Piper believes some names have debt coming due that will need to be refinanced, with Bandwidth (BAND), DigitalOcean (DOCN), and RingCentral (RNG) the most concerning.

MICRO-CATALYSTS: Piper further notes that approximately half of its names have “micro-catalysts” to pay attention to over the next year, including Akamai, Arista, Bandwidth, Cisco, Fastly, Five9, Nice, Nutanix, and Zoom (ZM). At a high-level, these include AI, favorable competitive changes, M&A, large deals, and upcoming large events like the Presidential election.

SECURITY: Security is the clear priority for CIOs in 2024, with Piper’s CIO Survey netting the best Security result in the survey’s history. The survey has been directionally correct relative to IT Security spending, & industry conversations point towards strong underlying dynamics. Those with the largest Security exposures in the firm’s coverage could see a benefit or more resilient spending, with increased encouragement around SASE & AppSec exposure — such as Cloudflare, Akamai, Fastly, Five9 — as these areas showed the largest year-over-year net-increases in its survey, the firm adds.