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7 Top Enterprise Software Stocks to Buy

These software stocks have long-term growth ahead.

Enterprise software and services stocks have been some of the hottest in the market in recent years. Unfortunately, the tech sector is off to a shaky start in 2021 as investors have taken profits on some of the best tech stocks of 2020. Fortunately, the Morningstar analyst team says weakness in top enterprise software stocks has created plenty of long-term buying opportunities. Research firm Gartner projects that global IT spending will grow by 6.2% in 2021 to $3.9 trillion, creating a tailwind for enterprise software stocks. Here are seven enterprise software stocks to buy today, according to Morningstar.

Microsoft Corp. (ticker: MSFT)

Microsoft’s Azure cloud services and its host of other enterprise applications, such as LinkedIn, Office 365, Dynamics 365 and Teams, make the stock the king of enterprise software. Analyst Dan Romanoff says the digital transformation of the global economy was accelerated by the health crisis in 2020, and Microsoft’s gaming business was a major social distancing winner. Romanoff says it’s extremely impressive that Microsoft continues to drive both revenue growth and margin expansion at its massive scale, and he expects even more growth in the future. Morningstar has a “buy” rating and a $263 fair value estimate for MSFT stock.

Adobe (ADBE)

Adobe is the market leader in creative content software, but the company also provides marketing automation and e-commerce applications. Romanoff says Adobe has done an impressive job of expanding its lead in creative software by evolving its business model over time from point solutions to a bundled Creative Suite to the subscription-based Creative Cloud. Romanoff says software as a service provides investors with greater revenue visibility, makes the company’s products more affordable and reduces piracy. Adobe shares are up more than 1,200% in the past decade. Morningstar has a “buy” rating and a $500 fair value estimate for ADBE stock.

Salesforce.com (CRM)

Salesforce.com is the world’s largest provider of customer relationship management software via a SaaS model. Romanoff says Salesforce’s deal sizes have been trending higher as a growing number of new customers are choosing to bite the bullet and digitize their entire organization rather than focusing on one specific area at a time. Salesforce’s late-2020 acquisition of workplace communication platform Slack (WORK) was controversial because of its $27.7 billion price tag, but Romanoff says Slack will provide flexibility for Salesforce customers in a post-pandemic operating environment. Morningstar has a “buy” rating and a $265 fair value estimate for CRM stock.

ServiceNow (NOW)

ServiceNow develops subscription-based services designed to help companies automate IT departments such as help desks and operations management. Romanoff says ServiceNow’s sales momentum continued throughout 2020 despite the economic disruption. He says the remote working environment in 2020 made many companies realize their digital infrastructure is insufficient to handle online workloads. Romanoff says ServiceNow’s “land and expand” strategy is working like a charm. The company attracts new customers with its workflow automation and then expands its penetration by tacking on additional IT and human resources services. Morningstar has a “buy” rating and a $573 price target for NOW stock.

VMware (VMW)

VMware is a market leader in private cloud software. Analyst Mark Cash says the company’s cloud partnership program was a strong point in the most recent quarter. VMware reported a record 35 customer deals worth at least $10 million last quarter. The company’s Kubernetes management platform was a particularly strong seller, accounting for eight of the 10 largest deals. SaaS revenue is now 22% of VMware’s total revenue — up from 18% a year ago. VMware’s backlog is also growing at a double-digit percentage pace. Morningstar has a “buy” rating and a $202 fair value estimate for VMW stock.

Splunk (SPLK)

Splunk provides a software platform for collecting, sorting, analyzing and storing machine-generated data. As of fiscal 2020, more than 90% of Fortune 100 companies were Splunk customers. Analyst Nupur Balain says Splunk’s platform enables businesses to gather and analyze vast quantities of data. In the era of big data, companies that don’t take a data-driven approach could be left in the dust. As the amount of data and the complexity of analyzing that data grows exponentially over time, Balain says Splunk will enjoy an extended growth runway. Morningstar has a “buy” rating and a $208 fair value estimate for SPLK stock.

Tyler Technologies (TYL)

Tyler Technologies specializes in creating essential software and technology for its public sector customers, which include school districts and local, state and federal governments. After years of rumors, Tyler acquired NIC (EGOV) for $2.3 billion in February. Romanoff says NIC is a perfect fit for Tyler given NIC specializes in creating portals for consumers to make digital government payments and access government services. He says Tyler will likely recover from the 2020 downturn in a stronger competitive position, much like it did following the 2008 recession. Morningstar has a “buy” rating and a $475 fair value estimate for TYL stock.

Seven top enterprise software stocks to buy:

— Microsoft Corp. (MSFT)

— Adobe (ADBE)

— Salesforce.com (CRM)

— ServiceNow (NOW)

— VMware (VMW)

— Splunk (SPLK)

— Tyler Technologies (TYL)

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