Investors are beginning to see artificial intelligence (AI) as more of a double-edged sword than a panacea for improving earnings in every industry. Software stocks have been hit particularly hard and analysts have recently blindly recalibrated their growth expectations across the sector, fearing that AI tools will replace the need for various applications. Investors are reducing the earnings multiples they are willing to pay for software as future earnings growth becomes less certain.
But the sell-off may have created some great opportunities for patient, long-term investors. The two stocks stand as maintaining strong competitive positions, and analysts see an upside of up to 100% for the shares based on the average price target on Wall Street.
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Here is the reason Intuit (NASDAQ: INTU ) and Salesforce (NYSE: CRM ) Worth buying now.
Intuit is best known for its TurboTax tax-preparation software and QuickBooks accounting software. It also owns Credit Karma, which monitors credit and recommends new loan products for consumers, and Mailchimp, which offers email marketing tools.
Management expects revenue growth of 14% to 15% this year, fueled by its push to develop an online ecosystem for its software. The ecosystem integrates features from Intuit’s various software and services to promote cross-selling for small businesses. For example, QuickBooks customers can sign up for a package that integrates TurboTax with their business taxes at the end of the year. Online ecosystem revenue accounted for 80% of Intuit’s business segment last quarter, growing 21% year over year.
This kind of land-and-expand approach should widen Intuit’s gap. Switching costs for small businesses are already high. Small business owners are usually more focused on growing their business than finding the cheapest or best solution for bookkeeping, tax filing, or email marketing.
Intuit’s below-average retention rate for a SaaS business is more likely due to the high failure rate of small businesses that fail to deliver any of its products to customers. In fact, Intuit states that small businesses that use QuickBooks actually have a higher-average success rate.
Intuit is also integrating its well-known consumer brands, TurboTax and Credit Karma, to strengthen retention and expand its revenue base. Moreover, the turbotax continues to grow despite efforts by the US government to promote free alternatives. This points to how sticky its software is, with customers willing to pay more for its robust features and maintain year-to-year consistency when filing taxes.
The average price target on Wall Street is $800, but the stock currently trades at just $400 after the sell-off. Some analysts may be in the midst of rerating the earnings multiple they’re willing to assign to Intuit, but at 17 times forward earnings, the stock looks too cheap to ignore right now. As mentioned, it’s growing revenue at a mid-teens percentage rate, and should see even stronger revenue growth as it scales to the online ecosystem.
Salesforce offers businesses a wide range of “cloud,” its term for cloud-based software-as-a-service (SaaS). Its products range from sales and customer service to marketing and commerce solutions. By providing a suite of services that all work together across enterprise operations, Salesforce has enabled it to maintain high net revenue retention rates for clients and consistently grow revenue over time.
Moreover, it paves the way for its efforts in AI. Salesforce introduced AgentForce in late 2023, which leverages proprietary enterprise data stored in Salesforce’s data cloud to complete multi-step tasks in the Salesforce software suite. Agentforce’s annual recurring revenue grew 330% year-over-year to $540 million last quarter. While that remains only a small part of Salesforce’s overall business, it’s still strong momentum for a major strategic initiative.
Because AgentForce integrates with the entire Salesforce software ecosystem, it can significantly increase customer spend on its subscriptions. Not only will they pay for the AgentForce agents and Data 360 service, but they’ll also pay to use the core Salesforce software packages.
Management outlined plans to re-accelerate revenue growth while expanding margins at its analyst day last fall. If it achieves its long-term vision of becoming a “Rule of 50” company (operating margin percentage and revenue growth percentage greater than 50), it should be worth much more than it is today. Its numbers indicate nearly 50% total revenue growth and strong operating margin expansion over the next few years.
The average price target on Wall Street is $325 per share, and the stock currently trades for just $190. This indicates a 72% upside for the stock. With shares currently trading for just 14.5 times forward earnings expectations, investors should expect this to fall short of management’s long-term forecast provided at an investor day last fall. While management is a little optimistic about the potential of AgentForce-powered businesses, the stock looks attractive given how Salesforce’s software is integrated into enterprises.
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Adam Levy has positions at Salesforce. The Motley Fool has positions and recommends Intuit and Salesforce. Motley Fool has a disclosure policy.
Selling Software: 2 Incredible Stocks With 72% to 100% Upside Buy Now, According to Wall Street was originally published by The Motley Fool.
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