Morgan Stanley’s new top software pick is a familiar winner

Shares of Salesforce Inc. are up 85% over the past 12 months, but Morgan Stanley sees plenty of juice left in their rally.

Analyst Keith Weiss tabbed the stock as his top pick Monday, reiterating his view that Salesforce

has the potential for 25% upside.

Last year’s run “was driven predominantly by a large step higher in Salesforce’s profitability profile, with limited multiple expansion,” Weiss wrote. This year, however, investors could take a rosier view of the company’s long-term revenue-growth potential and Salesforce’s standing in the world of artificial intelligence.

The prospect of Wall Street sentiment shifts on those two factors “gives a
clear catalyst path to driving CRM’s multiple back in line with peers on a growth-adjusted basis,” he wrote. Weiss flagged that Salesforce shares currently trade at a roughly 57% discount to shares of Microsoft Corp.
Adobe Inc.

and Intuit Inc.

on a growth-adjusted earnings basis. Those three names saw nice stock rallies last year as well, but theirs largely came on the heels of multiple expansion.

See also: Salesforce’s stock led the Dow last year. Why more gains could be in store.

What’s more, while forward earnings estimates for Salesforce have risen by nearly two-thirds over the past 12 months, the stock’s forward price-to-earnings multiple is up only by low double digits over the same span.

“From this perspective, we see strong support for our view on CRM having the best risk-reward in large-cap software, given recent share price performance driven more by improvements in company fundamentals than ‘animal spirits,’” Weiss wrote.

He continues to rate the stock at outperform with a $350 target price.

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