Software applications companies will lag behind infrastructure software in growth over the next five years, a Sanford C. Bernstein analyst predicted in a note Tuesday that initiated coverage of

Siebel Systems

(SEBL)

and

PeopleSoft

(PSFT)

with underperform ratings and launched coverage of

SAP

(SAP) - Get Report

with a market perform rating.

In his research note, Bernstein analyst Charlie Di Bona said he believes the software industry is entering an infrastructure software cycle in which enterprise applications growth will lag. He estimates enterprise applications will show a five-year compound annual growth rate (CAGR) of 6.2% vs. overall software growth of 9.3% and growth of 11.6% for infrastructure software.

He believes back-office applications, such as financial and human resources applications, will be among the slowest-growing, with a five-year CAGR of less than 3%. Software infrastructure includes the operating system, database and integration platform, while applications include software used to track employees, a company's finances or sales and marketing.

Di Bona, who used historical trends to reach his thesis, said he believes the infrastructure software cycle will last through the midpoint of the decade and then be followed by a reacceleration in Web services-based applications growth.

Consequently, he recommends investors invest in software companies positioned in what he calls the "growth sweet spot" -- those with exposure to integration or Web services platforms, such as

Microsoft

(MSFT) - Get Report

TST Recommends

and

BEA Systems

. He has outperform ratings on both stocks. His firm doesn't do investment banking business.

Besides SAP, Di Bona wrote, enterprise applications vendors are not well positioned to evolve into infrastructure software offerings and as a result will remain outside the growth sweet spot. He disagreed with some thinking that software integration among different vendors can be handled by applications rather than infrastructure.

Di Bona also raised concerns about the consensus thinking that industry-specific applications will drive growth and recovery, noting that such applications are more expensive to develop because they require special expertise and generally involve smaller sales.

Still, Di Bona said he rated SAP a market-perform primarily because of the German software maker's ability to mine its large installed base of customers for sales of products such as customer-relationship management and supply-chain management software with industry-specific features, as well as its new infrastructure-oriented integration product NetWeaver. He also believes SAP will take market share from Siebel in the CRM arena.

Di Bona recommends that long-term, Siebel investors opportunistically sell their shares. Despite the company's restructuring, he expressed doubt over Siebel's ability to reach its goal of 15% operating margins and said its competitive position is threatened.

Di Bona also noted that Siebel's price-to-earnings multiple has not adjusted to more moderate earnings expectations, with the company trading at more than 75 times his 2003 earnings estimate of 12 cents a share, the highest since August 2001. The earnings consensus gathered by Thomson First Call is a penny higher.

Di Bona also noted that several of Siebel's key markets, including financials and insurance, communications and high tech, continue to show depressed net revenue growth. Altogether they represent about 60% of revenue for the company, he said.

As for PeopleSoft, Di Bona was unimpressed with the company's merger with

J.D. Edwards

(JDEC)

. "We do not believe the combination of two fundamentally challenged companies is an inspiring merger rationale," he wrote. "Whether meaningful cross-sell and up-sell opportunities for PeopleSoft through its J.D. Edwards acquisition can be monetized is uncertain and unlikely to contribute in a material way to revenues in 2004."

Di Bona also said the product cycle of PeopleSoft's latest release appears to be waning. His opinion is that the company's limited offerings for specific industries cuts into its ability to sell to existing customers at the same time new customer growth is slowing.

Di Bona said Oracle's current $19.50 per share hostile takeover offer for PeopleSoft looks attractive given that he has valued PeopleSoft shares at $15, including J.D. Edwards.

Shares of SAP were down 18 cents, or 0.6%, at $29.29 in recent trading. Siebel shed 12 cents, or 1.3%, to $9.09 and PeopleSoft lost 12 cents, or 0.7%, to drop to $16.50 in recent trading. BEA was up 40 cents, or 3.1%, at $13.41 and Microsoft gained a penny to sit at $26.19 in recent trading.