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Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved

Friday, March 17, 2023

Software stocks: Adobe gains while Oracle slumps

By Century Financial in Brainy Bull

Software stocks: Adobe gains while Oracle slumps
Software stocks: Adobe gains while Oracle slumps

SaaS companies Smartsheet and Adobe reported positive earnings this week, which prompted a spike in shares, although cloud expert Oracle posted a narrow miss. Following a turbulent 2022, the industry is predicted to grow in value, despite the current economic downturn.

  • Adobe reports record revenues; Oracle posts a narrow earnings beat but misses revenue estimates; Smartsheet delivers surprise profit.
  • SaaS market predicted to grow to $328bn by 2027 at a CAGR of 6.6%.
  • Direxion Work From Home ETF offers exposure to all three companies and is up 6% year-to-date.

It’s been a busy week for the share prices of software companies, with Oracle [ORCL], Smartsheet [SMAR] and Adobe [ADBE] all having reported earnings.

Cloud specialist Oracle was first in line when it posted third quarter (Q3) 2023 results on 9 March. Revenues of $12.4bn represented a hike of 18% year-over-year, but narrowly missed analyst expectations of $12.42bn. The company reported non-GAAP earnings per share (EPS) of $1.22, beating forecasts of $1.20 per share, according to Refinitiv data. Oracle stock traded down 5% after hours. The share price has gained 1.9% year-to-date, but is down 6.1% over the past month.

Software peer Smartsheet posted revenues of $212.3m, up 35% year-over-year in its Q4 2023 earnings on Tuesday. The company announced diluted EPS of $0.07, compared to losses of $0.12 in the year-ago quarter, beating FactSet analysts’ predictions for losses of $0.01. The Smartsheet share price surged 17.8% on Wednesday.

Adobe released its Q1 2023 earnings on the same day. Record revenues of $4.7bn represented a jump of 9% year-over-year. Diluted EPS came in at $3.80 on a non-GAAP basis, trouncing forecasts of $3.68 from Refinitiv analysts. Adobe shares price traded up as high as 5% after hours.

Strong growth amid challenging macro environment

Despite Nuvei’s top-line beat in the October to December period, revenue growth had been “impacted unfavourably by changes in foreign currency exchange rates year-over-year and volatility from digital assets and cryptocurrencies", the Canadian fintech firm said in its earnings release.

Revenue excluding digital assets and crypto was up 26% year-over-year to $209.6m from $165.7m in Q4 2021. Guidance for fiscal 2023 is for revenue, excluding digital assets and crypto, to grow between 23% and 28%.

SentinelOne enjoyed strong customer growth, adding 750 new customers in its fourth quarter, up approximately 50% from the year-ago quarter. The number of customers bringing in annual recurring revenue of $100,000 or more was up 74% to 905.

There was also “ extremely strong” retention and expansion among existing customers, “proving resilient despite tight macroeconomic conditions”. Net retention revenue was up 130% year-over-year, well above the company’s long-term target of 120%.

StoneCo’s revenue growth was mostly down to a 49.3% jump in sales from its financial services platform. The company has been working hard to extend its offering to banking services, helping legacy banks to upgrade outdated systems.

​​"The fourth quarter consolidated a major turnaround that our business had over 2022," StoneCo's chief strategy officer Lia Matos told Reuters.

Well-positioned to navigate headwinds

Nuvei’s robust Q4 performance was cheered by Credit Suisse analysts, who upgraded the stock from ‘neutral’ to ‘outperform’. In a note to clients, they argued that Nuvei should be past the “bulk of the cryptocurrency-related headwinds”. The bank had previously downgraded the stock to ‘neutral’ last July in light of the challenging macro backdrop. The new price target on Nuvei’s shares is $45, implying an upside of 10.1% from the most recent closing price of $40.89.

Macro-related uncertainties, however, could impact enterprise spending. SentinelOne is expecting cybersecurity to remain “a top IT priority, driven by a fervent and evolving threat landscape”. Revenue growth is expected to be 75% in Q1 2024 and 51% for the full fiscal year at the mid-way point.

A new CEO will take the helm at StoneCo this month. Pedro Zinner “has more than 25 years of experience in leadership, strategy, risk management and finance, and he will bring a powerful vision to drive the next phase of value creation for our business”, outgoing CEO Thiago Piau said in a statement.

Funds in focus: the Global X Fintech ETF

Both Nuvei and StoneCo are held by the Global X Fintech ETF [FINX], with weightings of 0.93% and 0.89%, respectively, as of Tuesday. The fund is up 3.7% year-to-date, though down 9% in the past month.

StoneCo has been allocated 1.95% of the SoFi Gig Economy ETF [GIGE] as of Wednesday. The fund is up 15.8% year-to-date, though down 8.7% in the past month.

SentinelOne is held by several major cybersecurity-focused funds. The stock makes up 3.15% of the Global X Cybersecurity ETF [BUG] as of Tuesday, which is up 6.7% year-to-date and down 5.1% in the past month.

Cloud growth and conversions success

Oracle’s cloud-related sector – which includes infrastructures as a service (IaaS) and software as a service (SaaS) – delivered revenues of $4.1bn, leaping 45% year-over-year. Driving that revenue were large cloud deals that Oracle signed with high-profile clients including Uber [UBER], which it signed a seven-year strategic partnership with in mid-February.

Safra Catz, CEO of Oracle, said EPS reached the high end of guidance. However, the company said a strong dollar compared to foreign currencies dented EPS, which would have been $0.05 higher otherwise. Non-GAAP operating income of $5.2bn was up 8% year-over-year. Catz expects Oracle’s cloud business to grow 50% in the present quarter. Despite the forecasted cloud growth, Dan Morgan, senior portfolio manager at Synovus Trust, told Bloomberg that Oracle’s results were “a little bit of a disappointment”.

For Smartsheet, the total customers holding annualised contract values (ACV) of more than $100,000 surged by 45% year-over-year to 1,484, with 45 customers worth more than $1m each.

Speaking with Jefferies analyst Brent Thill at the earnings call, Smartsheet CEO Mark Mader said the company’s “conversion of pipeline” was especially successul, adding: “One of the things that was really encouraging to see was in business that did extend last quarter, a lot of that business converted this quarter.”

Meanwhile, Adobe’s digital media segment experienced healthy growth, with revenues climbing 9% year-over-year to reach $3.4bn. Creative revenues increased 8% to $2.8bn. The company’s digital experience segment revenue grew 11%.

Adobe chairman and CEO Shantanu Narayen singled out Adobe’s Creative Cloud, Document Cloud and Experience Cloud offerings as “mission-critical in fueling the global digital economy".

Positive future for SaaS despite macro challenges

Companies offering SaaS solutions are slated for future growth. Recent data from Globe Newswire forecasts the SaaS market will rise from $235.6bn last year to $253.6bn in 2023, growing at a CAGR of 7.7%. The report also predicts growth to $328bn by 2027 at a CAGR of 6.6%. Another report by Fortune Business Insights forecasts the global market will reach a colossal $883.3bn by 2029.

While Adobe stock fell 40% across 2022, the company raised its full-year forecast for 2023 at its earnings announcement, suggesting better times are ahead. It forecast adjusted EPS of $15.30 to $15.60 (up from $15.15 to $15.45), and digital media growth, including $1.7bn-worth of new annualised recurring revenue (up from $1.65bn).

Elsewhere, analysts at Jefferies recently retained a ‘buy’ rating on Oracle stock. According to a consensus of analysts at CNN, Smartsheet is also a ‘buy’.

However, SaaS remains vulnerable to macroeconomic trends, including inflation and high interest rates potentially hitting companies’ cloud computing budgets – something investors will want to consider.

Funds in focus: iShares Expanded Tech-Software Sector ETF

Investors seeking exposure to all three stocks could look at the iShares Expanded Tech-Software Sector ETF [IGV]. As of Wednesday, Adobe is the third-largest holding in the fund’s portfolio with 7.96% of assets under management (AUM). Oracle is the fourth-largest with 7.24% and Smartsheet accounts for 0.33% of AUM.

The fund is up by 9.3% year-to-date, but down 5.4% in the past month.

For those wanting greater exposure to Smartsheet stock, it is the second-largest holding in the Direxion Work From Home ETF [WFH], with 3.51% of AUM as of Thursday. The fund also holds Oracle as its seventh-largest holding, at 3.27% of AUM and Adobe shares at 2.63%.

The WFH fund is up 6% in the year-to-date, but down 9.6% over the past month.

Source: This content has been produced by Opto trading intelligence for Century Financial and was originally published on https://www.cmcmarkets.com/en-gb/opto/software-stocks-adobe-gains-while-oracle-slumps.

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