Trends in the enterprise software market favor big guns, says Goldman Sachs, and another wave of mergers and acquisitions seems likely with smaller players getting swallowed by the likes of Oracle (ORCL), SAP, Salesforce.com (CRM), Workday (WDAY) and Ultimate Software Group (ULTI).
Software companies with web-based, subscription-as-a-service business models have been market-share gainers against companies that sell one-time licenses.
“Our view is that larger (software) suite vendors (SAP, Oracle) and smaller ‘best-of-suites’ (Salesforce.com, Workday, and Ultimate Software) are best positioned for sustainable growth, due to broadening product portfolios that expand addressable wallet and enable bundling,” said the Goldman Sachs report. “When comparing today’s best-of-breed vendors (Blackline, Cornerstone OnDemand, and Zendesk) against today’s best-of-suite vendors (Salesforce, Ultimate Group, and Workday) and Oracle and SAP, the suite vendors continue to have superior non-GAAP operating margins and free cash flow margins.”
“Our view is that the wave of (mergers) is slowly beginning to build, and we would expect to continue to see a healthy dose of best-of-breed vendors consolidated into suites (both legacy software vendors like Oracle and SAP, as well as ‘born in the cloud’ vendors like Salesforce and Workday),” the note went on to say.
According to Goldman Sachs, a “suite is a collection of applications built around a core system of record, such as a financial database.”
Goldman Sachs raised Salesforce.com’s price target to 117 from 110, Workday’s to 101 from 96, and Ultimate Software’s to 220 from 204.
IBD’S TAKE: Salesforce.com and Workday are among enterprise software stocks with solid gains in 2017, but they swooned a bit in mid June amid high valuations and have recently bounced back….