Although there are still many unknowns, several experts such as HSBC’shHead of US technology research, Stephen Bursey, as well as HSBC analysts Abhishek Shukla and Govinder Kumar are flagging the software sector as a hedge for investors to consider during this period of economic weakness and uncertainty, especially amongst high quality names in the sector.
In their Apr 9 report, the trio notes that a lot of investor focus has been placed upon the hardware side of this artificial intelligence (AI) push as the demand for AI hardware surges with massive amounts of capital expenditure from hyperscalers in developing their own AI models. This has left investors underestimating the potential of the software sector in the global AI push.
“Most software companies improve their software annually and subsequently charge more for that new value-add. We think that the value creation potential by embedding AI into software solutions, through scores of orchestrated expert agents, is on a scale never seen before and the recent market pullback offers investors an attractive entry level,” the report notes.
In the software sector, most revenue models are recurring where payment obligations from a customer are contractually bound for a period of time, mostly through contracts of two to three years.
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This means that contracted revenue still remains even through economic weakness which leaves the software sector to shine when an economy weakens, supporting investments even in times of austerity. The report highlights four of the analysts’ preferred stock picks in the report, namely Salesforce, Oracle, Microsoft and ServiceNow.
Salesforce
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Salesforce has branded itself as a leading cloud-based customer relationship management platform that provides tools for improving customer connections through data analysis and AI.
HSBC expects a growth in the compound annual growth rate (CAGR) of Salesforce’s earnings per share (EPS) to accelerate to about 19,1% by FY2027-FY2029 from the current 10.5% growth rate expected in FY2026.
Salesforce has been working towards cost optimisation recently but the report notes that its selling, general and administrative expenses are still higher compared to peers of comparable scale which is an indicator that Salesforce still can improve their margins going forward.
“Software companies of Salesforce’s scale are generally able to earn 40%-plus non-GAAP (General Acceptable Accounting Principles) operating margins and we expect Salesforce to continue to move in the same direction,” notes the trio.
The trio also expects an acceleration of revenue growth as the company monetises its AI-based Agentforce. “We expect revenue growth to accelerate to 15% from FY2027 onwards, as the company makes progress with its Agentforce offering and embedded AI enhancements.”
HSBC maintains a “buy” rating on Salesforce, with a target price (TP) of US$411 ($554.27), a 55% upside on its current price as of Apr 10 (US$265.17).
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Microsoft
The US based technology conglomerate has the confidence of HSBC based on strong continuous growth expected by its cloud computing platform, Microsoft Azure.
“We believe Azure revenue could surpass AWS’s by 2026 or 2027. Apart from higher capital expenditure, Azure also benefits from Microsoft’s solid enterprise technology stack and many customers may feel comfortable shifting their on-premise Microsoft workloads to cloud,” the report notes.
HSBC feels that Microsoft shares are undervalued given Microsoft’s strong growth and healthy margin profile and forecast an FY2027 revenue CAGR of 20.4%. HSBC maintains its “buy” call on the stock with a TP of US$598, a 53% upside from its current price as of Apr 10 (US$390.49).
Oracle
Once a company producing mediocre mid-single digit revenue growths, Oracle has now become a big name in the cloud service provider space with high-teens revenue growth expectations.
The demand for Oracle Cloud Infrastructure has surged in recent years driven by robust AI infrastructure demand. The analyst from HSBC expects revenue from Oracle Cloud Infrastructure to rise at a CAGR of 65% across 2024-2027 on the back of the company’s “second mover advantage”, which has allowed it to offer more modular, higher performance and lower cost services than its competitors.
Oracle also stands to benefit from the mass adoption of AI by companies into its solutions to add significant value to its customers.
Oracle’s enterprise resource planning (ERP) is an end-to-end Software as a service suite that manages enterprise operations which has been adopted by many companies such as Starbucks and Cisco.
“Oracle ERP solves and facilitates some of the most complex business, planning, managing and analytics problems that account for a large portion of global GDP. The company is constantly improving the quality of its solutions to better deliver these services and is often charging more for these new improvements,” the HSBC report states.
On the valuation front, Oracle’s revenue is expected to rise at a CAGR of 16.4% from 2024 to 2027 which HSBC believes warrants a re-rating to come. HSBC reaches a “buy” call on the stock, with a TP of US$246, a 76.4% upside from its current price as of Apr 10 (US$139.69).
ServiceNow
ServiceNow is a software company that provides a cloud-based, AI-driven platform for automating multiple management workflows in enterprises. The company specializes in IT service management, IT operations management and IT business management.
The company has been a key beneficiary of the digital transformation and has been an early mover into the the AI space, with a track record of several AI offerings such as Pro and Pro Plus.
The company recently included an AI-based NowAssist agent offering along with Pro Plus. The
company intends to monetize the agent primarily via a consumption model to allow customers to see value from the product as they pay for it.
HSBC expects ServiceNow’s operating margin to grow to 34.7% by end-2027 from the current 29.6% as the company scales. The group arrives at a target price of US$1265 with a “buy” rating, reflecting a 53.1% upside from its current price as of Apr 10 (US$825.95).
