The continued stock market tumult derailed the long bull run fueled by accommodative monetary policy. The S&P 500 and NASDAQ have fallen nearly 14% and 25% respectively since the start of the year, to May 6, as runaway inflation forced the Fed to withdraw the punch bowl.
As a result, a stock market sell-off has opened up many attractive entry points for value-oriented investors as equities fall from their highs. Many of these stocks can be found in Morningstar’s robust universe of equity research coverage, which includes nearly 99% of the companies in the S&P 500 Index.
Those looking beyond the blue chip big tech names may want to look at the following players in the software application industry. Despite their current low valuations, they are expected to remain market leaders in their fields.
DocuSign (DOCU) offers the Agreement Cloud, an extensive cloud-based software suite that allows users to automate the agreement process and deliver legally binding electronic signatures from almost any device.
As a leader in electronic signatures and contract lifecycle management software, DocuSign has a long streak of growth through viral adoption in a market that has never been commercially tapped. “The company’s vision is to modernize the procurement process by moving it from disjointed, paper-based manual steps to an automated digital and collaborative system,” a Morningstar equity report said.
However, DocuSign is not limited to electronic signatures. The company’s cloud-based software, Agreement Cloud, includes tools to help users prepare contracts using intuitive drag-and-drop forms, negotiate, a variety of enhanced security and identification, automate agreement workflows to satisfy contract elements after execution, enable payment collection and centralize account management.
“We are also seeing existing customers adopting more use cases and expanding their seats [people with access to the system] over time, and also moving to the Agreement Cloud platform,” says Morningstar equity analyst Dan Romanoff, who puts the fair value of the stock at $130, incorporating an enterprise value/ sales of 10 and a free cash flow yield of 2%.
Strong adoption has attracted more than one million paying customers and hundreds of customers whose annual contract value already exceeds $300,000 per year.
“Management estimates that DocuSign has a total addressable market of US$50 billion, half of which is electronic signatures alone, while Agreement Cloud is the second largest, with other services being a smaller opportunity,” says Romanoff.
Salesforce Inc (CRM) offers enterprise cloud computing solutions, including Sales Cloud, the leading customer relationship management software as a service product. It also offers Service Cloud for customer support, Marketing Cloud for digital marketing campaigns, Commerce Cloud as an e-commerce engine, Salesforce platform, which enables businesses to build apps, and other solutions.
“We believe that Salesforce.com represents one of the best long-term growth stories in software,” says a Morningstar stock report, noting that continued margin expansion should continue to drive revenue growth. earnings of more than 20% per year for much longer, although revenue growth could dip below 20% for the first time at some point in the next few years.
After introducing the software-as-a-service model to the world, Salesforce.com has created a front-office empire it can build on for years to come. “The key differentiator for Salesforce.com was that the software was accessed through a web browser and delivered over the Internet, thus inventing the SaaS software delivery model,” says Romanoff, who puts the stock’s fair value at $320. implying a 2023 enterprise value/sales multiple of 10 times and a free cash flow yield of 2%.
Salesforce.com remains the undisputed leader in sales force automation (Sales Cloud) where it has grown from no product to 33% market share over the past 20 years. “Customers and industry observers consider Salesforce the undisputed leader in a category that increases sales rep productivity,” says Romanoff.
Salesforce’s wide moat, or sustainable competitive advantage, stems primarily from switching costs, with support from a network effect.
Coupa Software (COUP) is a cloud-based provider of enterprise spend management (BSM) solutions. It allows companies to monitor, control and analyze expenses in order to reduce costs and improve operational efficiency.
With a platform of over 2,500 companies and over 7 million suppliers, Coupa has built a robust and self-reinforcing ecosystem of AI-powered spend management. A Morningstar equity report predicts that “Coupa has a long streak of growth ahead of it as it continues to make strategic investments to expand its platform and spend management use cases.”
Coupa has been able to significantly expand its market reach as back office digital transformations accelerate and Coupa remains the leading cloud BSM provider in the market. “We expect Coupa partners to increasingly drive the adoption of Coupa in businesses while guiding their clients through digital transformation initiatives,” said Victoria Radke, equity analyst at Morningstar.
The company has invested heavily in transforming its platform into a more holistic expense management tool. “As the company introduces new modules, it will benefit from alignment with more spend use cases, greater suite synergies, and more cross-sell opportunities” , says Radke, who pegs the stock’s fair value at $120, projecting a five-year compound annual growth rate of 23% through 2027.
Additionally, a growing community will bolster Coupa’s AI-powered community intelligence offering. The company’s AI capabilities are best-in-class, with other players not providing the same breadth and depth of analysis from a spend and operational efficiency perspective. “As a result, Coupa will be able to maintain its leadership position in this space,” Radke notes.