On Wednesday, Citi updated its Back Office Software coverage models and preference rankings following the second-quarter results, highlighting a potential for certain small to mid-cap (SMID-cap) software names to experience a revaluation.
The firm has shifted its focus towards companies with underappreciated artificial intelligence (AI) narratives and those demonstrating solid execution. As a result, Pegasystems (NASDAQ:PEGA), Intapp (NASDAQ:INTA), and Workiva (NYSE:NYSE:WK) have emerged as Citi's new top picks in the sector.
The analyst from Citi noted the environment appears favorable for these companies due to a "more risk-on rate cut cycle with stability in IT budget spend and emerging AI opportunities."
This shift in preference is also aligned with the firm's positive outlook on AI stories, which has led to increased recommendations for Pegasystems, Intapp, and Box (NYSE:BOX), among others, that are expected to benefit from these market conditions.
In addition to the new top picks, Citi has also expressed a heightened preference for companies with a track record of solid execution. This list includes Datadog (NASDAQ:DDOG), SPS Commerce (NASDAQ:SPSC), Monday .com (NASDAQ:MNDY (NASDAQ:MNDY)), OneSpan (NASDAQ:OSPN), and Paylocity (NASDAQ:PCTY). These firms have been recognized for their effective operational performance, which could contribute to their growth and investor interest.
Conversely, Citi has reduced its preference for companies it perceives as having incremental execution risks. Appian (NASDAQ:APPN), Open Text (NASDAQ:OTEX), and Paycom Software (NYSE:NYSE:PAYC) have seen a decrease in preference due to these concerns.
Additionally, Citi has become less favorable towards companies with merger and acquisition narratives that are playing out, such as Smartsheet (NYSE:NYSE:SMAR) and Instructure (NYSE:INST).
Citi's analysis indicates a strategic pivot towards companies that are either leveraging AI effectively or have demonstrated consistent operational success. While the firm's new top picks are Pegasystems, Intapp, and Workiva, it also regards Intuit (NASDAQ:INTU) as its favored large-cap company within the sector.
This repositioning by Citi reflects its latest expectations for the back office software market and the potential for specific companies to gain investor attention in the current economic climate.
In other recent news, Intuit Inc (NASDAQ:INTU). reported a 13% revenue growth for the fourth quarter and fiscal year 2024, with a similar pace of 12% to 13% growth expected for fiscal year 2025. However, changes to the desktop ecosystem are projected to result in a $160 million revenue decrease in Q1 fiscal year 2025.
Despite this, the company's cash and investment reserves remain robust, with $4.1 billion reported at the end of Q4. Mizuho Securities, KeyBanc, Piper Sandler, and BMO Capital Markets have all maintained positive ratings on Intuit's shares, with price targets ranging from $725 to $768.
Intuit has also unveiled significant updates to its Generative AI Operating System (GenOS) and launched its new Intuit Enterprise Suite (IES), targeting a broader mid-market range. The company is preparing for its Investor Day, where it is expected to discuss its strategies for future growth, particularly in the mid-market and assisted tax services.
Analysts from Mizuho and KeyBanc anticipate that the Investor Day will be pivotal for Intuit in terms of building investor confidence. These recent developments reflect Intuit's ongoing efforts to expand its market reach and enhance its product offerings.
InvestingPro Insights
As Citi repositions its preferences in the back office software market, highlighting firms with compelling AI narratives and solid execution, Intuit (NASDAQ:INTU) stands out as its favored large-cap company. Intuit's impressive gross profit margins, which reached 79.62% in the last twelve months as of Q4 2024, underscore the company's operational efficiency and align with Citi's criteria for solid execution. The company's ability to consistently raise its dividend, doing so for 14 consecutive years, speaks to its financial stability and shareholder-friendly approach.
InvestingPro Tips also indicate that Intuit is a prominent player in the Software industry, which could be a driving factor behind Citi's favorable view. However, analysts looking at Intuit have revised their earnings downwards for the upcoming period, suggesting that while the company has strong fundamentals, there may be challenges ahead. With a market cap of $178.65 billion and a high P/E ratio of 60.34, Intuit trades at a premium, reflecting its status in the market but also signaling high expectations from investors.
For readers interested in a deeper dive into Intuit's performance and potential, InvestingPro offers additional insights with 17 more InvestingPro Tips available. These tips provide a comprehensive look at the company's financial health and market position, which could be invaluable for investors considering Intuit as part of their portfolio.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.