Software stocks rallied Wednesday amid a handful of upgrades from analysts who expect a stronger-than-anticipated finish at the end of the year.
led the way, hitting a new 52-week high of $34 before dipping to $33.90, still up $2.80, or 9%.
Morgan Stanley analyst Ross MacMillan raised his rating on SAP to overweight. MacMillan said that he expects to see a relatively strong finish to IT spending in 2003, that many SAP customers are beginning investment plans for upgrades, and that SAP and European software has underperformed in the last two months. The brokerage also raised its view of European technology software and services. (Morgan Stanley expects to receive or intends to seek compensation for investment banking services from SAP in the next three months.)
Other software names also set new 52-week highs Wednesday, including
. Shares of bellwether
, which has underperformed the market in recent months, climbed more than $1 before settling at $28.24, still up 98 cents, or 3.6%, in heavy trading.
One day after Goldman Sachs raised its view of U.S. software to attractive from neutral, Credit Suisse First Boston on Wednesday upgraded its sector weighting on both infrastructure and enterprise software to overweight from market weight.
"Despite the potential for a rocky third quarter, we are moving unequivocally into the bull camp," CSFB's Gibboney Huske wrote in her research note on enterprise software. "We believe a return to discretionary spending will result in the software sector outperforming the market over the next 12 months, given the group's inherent operating leverage."
Huske noted that software has sat out the recent rally, with the S&P software index rising only 12.5% year to date vs. 14.6% for the
. But she said improvement in key industries such as financials and manufacturing could help software makers come in ahead of expectations in the fourth quarter.
Unlike other analysts such as
Sanford C. Bernstein's Charlie Di Bona, Huske said she expects applications companies to see greater marginal improvement in a recovery than infrastructure software companies, though she acknowledged that pricing pressure will remain a challenge.
"While infrastructure spending can save money in periods of tightening budgets, applications drive real business value in terms of more efficient sales productivity, shorter time-to-market and reduced supply chains," she wrote. "It is difficult for us to see sustained growth in infrastructure spending without an apps recovery."
Huske pointed to
, which she upgraded to outperform from neutral, as the best vehicle among the stocks she covers to play a return to discretionary spending, particularly in the financial services and telecommunications industries.
In a note titled "Hold Your Nose and Buy," Huske acknowledged that Siebel is one of the more controversial and under-owned names because of the "drum-beating" of its suite competitors. These competitors, she wrote, claim that customers prefer to buy applications from a software vendor that can offer applications in such fields as finance and human resources in addition to Siebel's core customer relationship management market.
But Siebel is near a fundamental bottom, given the initial signs of recovery in its key verticals, and the company continues to post significant wins against suite vendors, Gibboney said. Her firm expects to receive or intends to seek investment-banking-related compensation from Siebel within the next three months.
CSFB analyst John Rizzuto also raised his rating on infrastructure software to overweight from market weight, on the basis of stabilization of demand and potential for upward revenue and earnings revisions beginning in 2004. He, too, said he is expecting typical seasonal strength in the fourth quarter beyond current forecasts.
Rizzuto noted that the consensus estimate on the companies he covers calls for fourth-quarter revenue to grow 10.4% sequentially, the same as last year, and 1.5% year over year, which he calls conservative. Rizzuto said aggregate sequential software revenue could reach 12% to 15% in the fourth quarter. The companies in his coverage area include Computer Associates,