Investors are starting to view artificial intelligence (AI) more as a double-edged sword than a panacea for improving earnings across every industry. Software stocks have been hit particularly hard and rather indiscriminately recently as analysts recalibrate their growth expectations across the sector with fears that AI tools will replace the need for various applications. Investors are decreasing the earnings multiples they're 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. Two stocks stand out as maintaining strong competitive positions, and analysts see upside of as much as 100% for shares based on the median price target on Wall Street.
Here's why Intuit (INTU 1.25%) and Salesforce (CRM +2.65%) are worth buying now.
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Intuit: 100% upside implied by the median price target
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 provides 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 might sign up for a package that integrates TurboTax for their business taxes at year-end. Online Ecosystem revenue accounted for 80% of Intuit's business segment last quarter, growing 21% year over year.
This sort of land-and-expand approach should widen Intuit's moat. Switching costs for small businesses are already high. Small business owners are usually more focused on growing their business than finding a cheaper or better solution for bookkeeping, tax filing, or email marketing.
Intuit's lower-than-average retention rate for a SaaS business is more due to the high failure rate of small businesses than to any failure of its product to deliver for its customers. In fact, Intuit points out that small businesses using QuickBooks actually have a higher-than-average success rate.
NASDAQ: INTU
Key Data Points
Intuit's also integrating its well-known consumer brands, TurboTax and Credit Karma, to strengthen retention and expand its revenue base. Furthermore, TurboTax has continued to grow despite efforts by the U.S. government to promote free alternatives. That points to how sticky its software is, with customers willing to pay more for its robust features and to maintain year-to-year consistency when filing taxes.
The median 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-teen percentage rate, and it should see even stronger earnings growth as it scales the online ecosystem.
Salesforce: 72% upside implied by the median price target
Salesforce offers businesses a wide range of "clouds," its term for cloud-based software-as-a-service (SaaS). Its products range from sales and customer service to marketing and commerce solutions. Offering a suite of services that all work together across an entire enterprise's operations has enabled Salesforce to maintain a high net revenue retention rate for customers and consistently grow earnings 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 multistep tasks across the Salesforce software suite. Agentforce's annual recurring revenue climbed 330% year over year in its most recent quarter, reaching $540 million. While that remains just a small portion of Salesforce's overall business, it's still strong momentum for a key strategic initiative.
Since Agentforce integrates with the entire Salesforce software ecosystem, it could significantly increase customer spending on its subscriptions. Not only will they pay for Agentforce agents and the Data 360 service, but they'll also spend to use the core Salesforce software packages.
NYSE: CRM
Key Data Points
Management outlined plans to reaccelerate revenue growth while expanding margins at its analyst day last fall. If it achieves its long-term outlook of becoming a "Rule of 50" company (operating margin percentage plus revenue growth percentage exceeding 50), it should be worth much more than it is today. Its numbers imply about 50% total revenue growth and strong operating margin expansion over the next few years.
The median price target on Wall Street is $325 per share, and the stock currently trades for just $190. That implies 72% upside for the stock. With shares currently trading for just 14.5 times forward earnings expectations, investors must be expecting it to fall well short of management's long-term forecast provided at last fall's investor day. Even if management were slightly optimistic about the potential of the business driven by AgentForce, the stock looks attractive given how entrenched Salesforce's software is among enterprises.
