Goldman says these resilient software stocks are buys even in an economic ‘hard landing’

Published Mon, Oct 17 202210:00 PM EDT

Software stocks have taken a beating this year, but Goldman Sachs thinks there are some names in the space that can withstand a sharp economic downturn. The iShares Expanded Tech-Software ETF ( IGV ) is down more than 36% year to date. As of Monday, it traded more than 40% below its 52-week high. Of the 118 component stocks making up the ETF, 42 are down at least 50% for 2022, and 78 are trading more than 40% below their 52-week highs. Those losses come as the Federal Reserve raises rates to fight inflationary pressures not seen in roughly 40 years. The Fed has raised rates five times this year, bringing the fed funds rate to a range of 3%-3.25%. Despite all of this, Goldman's Kash Rangan was able to identify some software stocks that can be resilient despite an economic "hard landing," or if the U.S. economy tumbles into a recession. "The characteristics we use to identify these companies include: 1) Underpenetrated market, 2) High IT spending priority, 3) Low [average selling price], 4) Quick time-to-value, 5) High customer retention, 6) High degree of incremental operating leverage/cost discipline and 7) [free cash flow] generative or clear profitability timeline," Rangan said. Microsoft is one of the software stocks that made the list. The tech giant is down about 30% year to date and has fallen 32% since reaching a 52-week high last November. However, Rangan noted that Microsoft's "large footprint within the enterprise and its vast product portfolio, which extends across an organization (Office, Azure, Github, etc), leaves it well positioned to continue to win deals and expand its wallet share amongst its customers. In a slower growth environment, this creates a strong bundling opportunity, which can gain traction as customer willingness to add new vendors (point solutions) decreases." Goldman has a buy rating on Microsoft and a price target of $330, representing upside of 44.4% from Friday's close. Intuit also made the list, with Rangan touting the "predictability of its tax business and its ability to grow wallet share via its adjacent offerings (payments, payroll, capital). The stock is down 38% year to date and has tumbled 44% from its 52-week high. Goldman rates intuit as a buy and sees upside of roughly 51% from Friday's close. Another stock that made the list is Atlassian . Rangan said that the company can "benefit from the secular trend toward enhancing workflow productivity and the simplification of the IT stack." Based on Goldman's $300 price target, the stock can rally nearly 59% from Friday's close." — CNBC's Michael Bloom contributed reporting.