The market’s precipitous slide resumed on Wednesday. Following an uptick on Tuesday with the announcement of a stimulus program, the trend was reversed again on Wednesday with the S&P 500 closing down by a further 5%.
While no one is rejoicing in the current state of affairs, there is no doubt the severe market correction has presented investors with a new set of opportunities not available before the crisis began.
“What characteristics do you look for in time a like this? Asked Canaccord’s Richard Davis. “Valuation is rarely a defense if a company misses a quarter, and the punishment for a miss in this kind of market is extra severe. Therefore, be super careful that you buy only companies with pretty much bullet-proof prospects that won’t miss,” the 5-star analyst added.
It’s worth taking Davis’s advice on board. The Canaccord analyst’s performance in pin-pointing compelling investments is second to none. After all, that is the reason why Davis sits at the summit of TipRanks’ Top 25 Wall Street Analysts.
Taking his advice into consideration, we followed the trail on 3 companies the Street’s best performing analyst recently reevaluated. Using TipRanks’ data, we uncovered two important facts: All currently boast upside potential in excess of 50%, in addition to being rated as Strong Buys by the analyst consensus.
Avalara Inc (AVLR)
Let’s start off with a company Davis compliments by acknowledging: “We wish all of our companies executed as well as Avalara and followed their playbook.”
High praise indeed. Still, that hasn’t shielded the tax compliance software provider’s fortunes from those of the broader market. Although until recently, following the outbreak’s devastating impact on the markets, Avalara was holding steady, the avalanche finally caught up. Over the last week the Seattle based firm has shed 21% of its value. The old saying goes that nothing is certain but death and taxes. You can probably add to the list, that nothing will escape a global virus’ impact, either.
Nonetheless, Davis is convinced of Avalara’s value. So much so, that he calls the company one of his “desert island” stocks – “a stock we would want to own if we couldn’t touch it for several years waiting for a rescue,” he said.
The numbers back up Davis’s claims, too; Avalara’s latest quarterly report was a solid one. Despite EPS of $-0.03, the number still came in ahead of the Street’s call for EPS of $-0.09. Revenue of $107.63 million beat the estimate by $7.53 million and displayed year-over-year growth of 40%, the uptick attributed to “robust demand and strong sales execution, bolstered by strong secular tailwinds.” In addition, Avalara’s total customer count is up to 11,960, with the addition of 720 new customers in the quarter and net revenue retention hitting 111% both in Q4 as well as for the year.
Unsurprisingly, Davis keeps his Buy rating on Avalara intact, while also giving the price target a boost – up from $100 to $105. From current levels, the upside is a strong 78%. (To watch Davis’s track record, click here)
Is the Street as excited about the tax software specialist as Davis? It appears so. Buy ratings only – 7, in fact – add up to a Strong Buy consensus rating. The average price target comes in slightly higher than Davis’s, and at $106.71, could provide returns of 81% in the coming months. (See Avalara stock analysis on TipRanks)
A big player in the cloud-computing sector, Salesforce now boasts a market cap of a massive $118 billion. Let’s note the enormous valuation comes following a downturn of almost 19% year-to-date. In these crazy times, this loss of value stands up relatively well to the S&P 500’s 26% drop this year.
Salesforce growth has come alongside a seemingly never-ending shopping spree, the most recent of which came with last month’s acquisition of Vlocity, a leading provider of cloud and mobile software, for $1.3 billion. “Other than Snowflake, “Davis said, “Vlocity was probably the hottest private software company on the planet.”
The purchase joins other recent high-profile acquisitions. Last year Salesforce bought Tableau Software for $15.7 billion, ClickSoftware for $1.35 billion, and a number of smaller companies including MapAnything, and Griddable.
In tandem with the latest acquisition, the company also announced CEO Keith Block was leaving his post. Acknowledging the blow Block’s loss represents, Davis is unconcerned in the long term. “Salesforce is far more than just one person, and so we acknowledge investor angst, but suggest that everything will be fine,” he said.
Davis added, “Salesforce rarely drops out of our top 5 best pick slots for the simple reason the company continues to execute well, and the valuation is attractive. Is the firm perfect? Of course not, but despite grumbling about high prices, Salesforce has the most complete software stack to connect companies with customers via marketing, sales, service and commerce.“
Davis’s price target is raised from $185 to $200, along with keeping the Buy rating in place. Should the target be met, investors will pocket a 51% gain.
The Street may be empty, but the Salesforce cheerleaders are out in full force. 23 Buys vs 2 Holds add up to a Strong Buy consensus rating. The analyst community forecasts 50% upside, should the average price target of $208.50, be met in the year ahead. (See Salesforce stock analysis on TipRanks)
Some companies’ valuations have really taken a beating over the last month, none more so than search focused software-as-a-service (SaaS) company, Elastic. Over the last 30 days, the stock has shed 40% of its value.
The pullback is a sign of the times as the downturn comes despite a strong showing in the company’s latest quarterly statement. Total revenue in the quarter increased by 61% in constant currency to $113.2 million, the figure handily beating the Street’s call for $107.3 million. EPS came in at $0.28, easily ahead of the Street’s expectation for a loss per share of $0.36.
Davis argues Elastic is more than a “far superior enterprise search engine than ancient systems,” as its search functionality extends to log files, APM (application performance management) and end point security, too.
The 5-star analyst added, “Stepping back from the noise and focusing on the signal, our independent checks on Elastic’s outlook remain disproportionately favorable… We have already uncovered signs of additional scrutiny on IT spend in response to coronavirus disruptions, the good news in this case is that Elastic delivers exceptional value for the dollar, so the firm should be able to plow through what could be a turbulent 2020… Our bullish supposition is that in 2020 we will see complexity diminish and growth that remains exceptional, a combination that will lead investors to conclude that Elastic has a long-tail growth opportunity ahead.”
What does it all mean for investors, then? A reiteration of a Buy rating, alongside a $90 price target. Therefore, Davis sees Elastic adding a huge 104% to the share price in the coming months.
The Street backs up Davis’s call. The consensus rates Elastic a Strong Buy based on 6 sole Buy ratings. With an average price target of $95, the analysts forecast a 100% addition to Elastic’s share price in the next twelve months. (See Elastic stock analysis on TipRanks)