What happened
Investment bank Bernstein charged back into the tech sector Wednesday morning, announcing a series of new ratings for stocks including Zoom Video Communications (ZM 0.05%), Okta (OKTA -0.65%), and Atlassian (TEAM -0.22%). All three of these stocks headed higher in response, ending the session up by 4.9%, 7.7%, and 11.2%, respectively.
But there's one stock that Bernstein analyst Peter Weed prefers above the others.
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So what
Bernstein's Weed initiated coverage of videoconferencing leader Zoom with a market perform (neutral) rating and a $122 price target that implies Zoom stock could gain as much as 14% over the next 12 months.
"Zoom was a COVID tailwind poster child," Weed explained in a note covered on StreetInsider.com, pointing out that the company grew its revenues by a factor of five over the course of just five quarters as vast numbers of people shifted to working from home. As most pandemic-related restrictions eased, however, Zoom's sales growth slowed. Meanwhile, operating costs rose "twice as fast as sales," resulting in a 50% year-over-year drop in earnings last quarter.
While Weed believes Zoom can keep growing at a more modest 17% annualized rate, he was more cautious on profitability -- hence his reluctance to recommend buying the stock.
At Okta, the revenue story is a bit better with "an exciting near 40% 'organic' growth" rate. (In fact, sales were up 65% last quarter). On the other hand, Weed remains pessimistic about profits here as well. Okta, noted the analyst, is promising investors a "20% free cash flow margin by 2026" -- but he thinks margins in low single digits are more likely.
Result: Until Okta proves its estimates are better than his, the analyst is sticking to the sidelines with a market perform rating.
Saving the best for last, though, Weed also started covering Atlassian -- and this one, he likes quite a lot. Assigning Atlassian a price target of $257-- more than 20% higher than it closed Wednesday -- he gave it an outperform (buy) rating. The analyst praised the company's "consistent 30%+ growth at 30%+ Free Cash Flow" performance, and predicted it will more than double sales to $6 billion over the next three years.
Although Atlassian, too, has warned that its profit margins are coming under pressure, Weed isn't concerned. He predicted fully 25% of revenues will convert to operating profit in 2025, flipping this company from a $720 million trailing loss today to something like a $1.5 billion profit three years from now.
Now what
Clearly, Weed favors Atlassian stock over both Zoom and Okta. I couldn't help but notice, though, that even if he is right about his numbers, this is still a recommendation to buy stock in a company that will cost more than 30 times operating profit three years from now. Moreover, Atlassian shares currently cost more than 62 times free cash flow (FCF).
Granted, that's better than Okta's valuation of 290 times FCF. It's still quite a lot to pay, however -- even for Atlassian's 30% projected FCF growth rate. In contrast, Zoom stock costs closer to 20 times FCF currently, and even with growth at Zoom projected to average only 13% over the next five years, that's still a more attractive valuation ratio (as well as an easier growth target to achieve).
Long story short, while I agree with the Bernstein analyst that Okta isn't quite cheap enough to buy yet, I'm also hesitant to overpay for Atlassian. Zoom stock, in contrast, offers more of a "happy medium" to me -- slower potential growth, but a much more attractive stock price. Of the three tech stocks, it's the pick I like best.
