BMO's Take On The Big Four Software Stocks

• Shares of Microsoft Corporation MSFT, SAP SE (ADR) SAP, Red Hat Inc RHT and Oracle Corporation ORCL have been under pressure over the past one month.
• BMO Capital Markets’ Keith Bachman initiated coverage of Microsoft and Red Hat with Outperform ratings and of Oracle and SAP with Market Perform ratings.
• Scale benefits could help legacy software companies make cloud transitions, Bachman stated.

Although the Cloud is expected to continue to disrupt the IT landscape, this does not spell the end of the traditional IT providers, such as Microsoft, Red Hat, Oracle or SAP, analyst Keith Bachman mentioned. He said that several legacy software companies enjoyed scale benefits, which could assist them in making cloud transitions.

Bachman cited the following benefits:

1. Global brand recognition
2. Global reach with salesforce
3. Incumbency
4. Cost scale
5. Diversified portfolio

Microsoft

Bachman mentioned that Microsoft seems to be aggressive in adopting new strategies. The company has embraced competitors’ products where appropriate and has offered Windows 10 away for free with the aim of forming an ecosystem.

The analyst believes that the change in management, in early-2014, was “a positive step.” He expects growth of Microsoft’s core enterprise products and Azure growth to drive shares higher.

Red Hat

Red Hat appears poised to generate mid-teens growth. Bachman believes that the company’s open source software portfolio can “increasingly become “the glue” for enterprise clients, bridging on-premise environments with public cloud resources.”

Oracle

Although Oracle was late to adopt the Cloud, it is now “aggressively pushing to generate cloud revenues,” Bachman wrote. He expressed concern, however, regarding Oracle’s cloud products being as competitive as management seems to suggest.

Oracle should be able to grow its cloud customer base by leveraging its installed base, the analyst said, while adding that valuation appears attractive.

SAP

A majority of SAP’s revenues is generated from on-premise sources. SAP pursued an aggressive M&A strategy to increase its cloud capabilities. Bachman commented, however, “We are not convinced that HANA is as differentiated as SAP claims.”

Although SAP’s products are “extremely sticky,” current valuation does not appear attractive.