When Goldman talks, investors listen. For example, in April, a Goldman analyst warned of a "super-spike" in oil prices and indicated that oil could reach $105 a barrel. On the news, oil did, in fact, spike.
Well, Goldman made another interesting call: This week, the firm got bullish on the software sector. Don't expect a super-spike in prices, but Goldman lifted its outlook from "neutral" to "attractive."
Why the upbeat news? Isn't software a mature industry?
Goldman analyst Rick Sherlund thinks that the Internet is leading to new models of software for the enterprise. This Internet-centric approach is known as Web services.
Essentially, Web services allow computers to talk to each other regardless of hardware and operating systems. This is done by software companies adhering to various standards (with such names as XML, UDDI, SOAP, and so on). This makes it easier for developers to build new applications. Actually, Sherlund calls this the "next big thing."
Sherlund believes that the beneficiaries will be the large software companies such as SAP (NYSE:SAP), Oracle (NASDAQ:ORCL), Microsoft (NASDAQ:MSFT), and even beleaguered Siebel (NASDAQ:SEBL). Increased "interoperability" is the buzzword here. This equates to platforms that talk to each other on a real-time basis -- enabling organizations to distill granular level data in order to determine pockets of under- and over-performance on a rolling basis, which serves to enhance performance management in a targeted manner.
However, he thinks it could take several years. While there has been cooperation among the big software companies -- such as that between Sun Microsystems (NASDAQ:SUNW) and Microsoft -- the complexities can make things a slog. But Sherlund thinks the valuations in the sector look attractive. Besides, the big companies are in the process of re-architecting their old ways of doing things.
So, if Web services are the "next big thing," why not buy today's innovative leaders in the space? One that stands out is Salesforce.com (NYSE:CRM), which had a blowout quarter. There is no need to wait for this company to revamp its software; it's already a pure Web services player. But, of course, it is not without its risks -- the company carries a rich P/E, though its growth numbers are well in excess of industry standard.
Fool contributor Tom Taulli does not own shares mentioned in this article.
