Software Pair Trade? Barclays Analyst Provides Ideas

• In a report issued Wednesday, Barclays analysts led by Raimo Lenschow and Saket Kalia shared their 2016 outlook for the U.S. software industry.
• The experts remain positive on the industry and said cash will be king this year.
• They upgraded Paycom Software Inc (NYSE: PAYC) to Overweight; downgraded Workday Inc (NYSE: WDAY) and Demandware Inc (NYSE: DWRE) to Equalweight, and Cornerstone OnDemand, Inc. (NASDAQ: CSOD) and Teradata Corporation (NYSE: TDC) to Underweight.

Analysts at Barclays expect "relatively stable macro data points" in 2016. These should drive stable though unimpressive IT spending growth. The experts anticipate FX will remain a neutral factor for now. However, it could once again become a headwind again the firm's FX predictions hold true.

In said backdrop, they think the focus on cash rather than “growth at any price” theme seen in 2015 will go on to play out in the software industry.

Cloud And Big Data

One of the main themes in software will continue to be the cloud. Microsoft Corporation (NASDAQ: MSFT) will probably remain "the safe choice for many software investors around the public cloud, but the more interesting call is likely around Oracle Corporation (NYSE: ORCL) and its ability to potentially stage a comeback in 2016."

SaaS also remains a key trend, and Barclays continues to select salesforce.com, inc. (NYSE: CRM) as its Top Pick. However, they envision competition will intensify in major product areas such as HR, with potential issues for Cornerstone and Workday.

Finally, "big data and analytics vendors continue to gain wallet share and progressively more so from the displacement of legacy solutions like TDC."

The Pair Trade

The analysts like Paycom for its "healthy and profitable growth in the SMB Payroll space." They noted that its market opportunity remains substantial and Street estimates seem low.

On the other hand, Workday and Demadware's lack of profitability are likely to hold back these stocks, even in spite of their large addressable market.

Finally, they highlighted that Cornerstone is both unprofitable and facing surging competition, while Teradata needs to overcome too much deflationary pressure in the short term.

Disclosure: Javier Hasse holds no positions in any of the securities mentioned above.