HSBC, an investment firm, has initiated coverage on nine software-based companies with buy, hold, and reduce ratings. The ratings are based on trends in cloud computing, artificial intelligence, and digital transformation that could drive growth. HSBC gave buy ratings to companies like Fortinet and Synopsys, believing that their leveraged operating models will deliver strong performances. The firm also highlighted the benefits of cloud computing, the urgency of digital transformation highlighted by COVID-19, and the promise of AI in enhancing software platforms.
According to HSBC analysts, the market may be overlooking the positive attributes of these software companies despite the uncertain macro backdrop. Software projects typically do well on customers’ investment rank order lists when capital budgets come under stress, as they improve productivity and can stabilize ongoing operations. HSBC also noted that the shift to the cloud is still in its early stages, expecting elevated demand for a decade or more.
However, the analysts also cautioned that leverage in these software models will be non-linear, with periods of enhanced leverage, detracted leverage, and even negative leverage. The timing and magnitude of monetization for AI remains uncertain, leading HSBC to take a conservative near-term view. Nevertheless, the firm believes that these software companies are at critical stages of their operations and are well-positioned to drive above-market turnover growth.