With earnings on tap, SaaS companies see challenges and opportunities

Heading into the first major earnings reporting season of 2022, companies that fall under the Software as a Service, or SaaS umbrella, are facing a challenging market that is likely to remain volatile for the foreseeable future.

That’s the opinion of a group of Morgan Stanley analysts led by Keith Weiss, who said they are turning their attention toward what they call “high quality names” in an industry that has seen stock prices drop across the board this year. And with a choppy economic environment, the continuing specter of the Covid-19 pandemic and Russia’s ongoing war against Ukraine weighing on investors’ minds, the SaaS sector is seen as likely to remain under pressure for some time to come.

“The prospects of rising interest rates and geopolitical unrest create a challenging market backdrop,” said Weiss & Co., who noted that SaaS companies have seen their share values decline by an average of 23% over the first three months of 2022.

However the Morgan analysts said that after surveying corporate chief information officers, and checking with product channels, there has emerged “a surprisingly durable view on demand,” which should benefit SaaS companies with stable enterprise customers, defensible information technology spending and strong margins.

Among the SaaS companies that Morgan Stanley said stood out at the present time is ServiceNow (NYSE:NOW), which Weiss said is “well positioned to benefit from a healthy enterprise IT spending environment,” and a product line that should help the company take IT market share. Weiss said key factors for investors will be what ServiceNow’s (NOW) management has to say about the durability of its growth prospects, and if the company will be able to outperform it targets for profit margins to be flat this year. Weiss holds an overweight rating on ServiceNow’s (NOW) stock.

ZoomInfo Technologies (NASDAQ:ZI) remains in Weiss’s favor due to strong growth in 2021 that has given the company “a solid setup heading into 2022.” Weiss, who has an overweight rating on ZoomInfo’s (ZI) shares, said the company is continuing to benefit from ongoing hybrid and remote working environments, being able to sell new and improved products to its existing customers, and the market undervaluing ZoomInfo (ZI) shares.

Weiss said that Qualtrics International (NASDAQ:XM) should be able to outperform its software rivals as it builds its presence in the experience management market in which companies and looking for ways to get better real-time feedback from their employees and customers. Among the steps Qualtrics (XM) is taking is expanding its offerings to appeal to customers in the marketing, human resources and call center industries, which should lead to a premium on the company’s shares in the months ahead. Weiss has an overweight rating on Qualtrics’ (XM) shares.

Morgan Stanley analyst Elizabeth Porter was upbeat about UserTesting (NYSE:USER), another maker of user experience and engagement software. Porter, who holds and overweight rating, said that the small-cap company’s shares have outperformed those of rivals this year, and are up about 25% over the past three months. The company’s last results came in better than expected, and UserTesting (USER) also raised its outlook for its most-recent quarter. Porter said UserTesting (USER) provides a “compelling” option for companies that looking to get more insights into their customers’ experiences during what Porter said was the current “uncertain” economic environment.

Tech earnings reports will kick into high gear on April 19, when IBM (IBM) gives its first-quarter report. Morgan Stanley analyst recently raised his rating on IBM (IBM) to overweight, and set a $150-a-share price target on Big Blue’s stock.