Goldman Sachs turned long-term bullish on software Monday, arguing that the increasing adoption of so-called Web services standards represents a credible "next big thing" for the sector's bigger players.
Goldman's Rick Sherlund, one of the higher profile analysts in the sector, raised software to attractive from neutral, commenting favorably on heavyweights including
. He reiterated outperform ratings on Microsoft, SAP and Mercury and left Oracle at in-line, while raising security favorite
For investors worried the payoff in Web services is too far off, Sherlund noted that most software stocks are attractively valued right now and will probably benefit from the traditional year-end strength in the industry.
The lion's share of the note dealt with Web services, the term for a group of platforms and applications that use the XML Internet language to link up over a network. Sherlund depicted the information technology industry as entering a third cycle in which companies "begin to replace existing computing architectures and applications to take advantage of this new platform of computing, a cycle that will likely last for the next five to 10 years."
The Web services cycle itself is entering a second phase, he argued, one that will see the "re-architecting" of existing packaged applications from Microsoft, SAP, Oracle and
. This should inaugurate a "replacement cycle" in which other companies develop products that run on the new architectures.
"We suggest positioning early in the companies that are expected to be leaders in this next generation, even if the benefits are still a few years off for some, given that valuations are still attractive (and) investor sentiment is still pretty negative on the software sector. And if these stocks benefit as we would expect from a typical second-half rally, it is not clear that valuations of these better-positioned companies will come back down to these levels, even in the seasonally slower first half next year, if there is a strong secular story building for 2006 and 2007."
Goldman has an investment banking relationship with Microsoft, McAfee, Siebel and Oracle.