These little-known software stocks are poised for big gains going forward, Goldman Sachs says

Published Fri, Oct 21 20227:54 AM EDTUpdated Fri, Oct 21 20227:54 AM EDT

It's time to buy emerging software stocks Vertex and Workiva , according to Goldman Sachs. Analyst Adam Hotchkiss initiated coverage of the two companies with buy ratings while identifying firms supporting "essential" processes that have the greatest upside from here. "We believe that growing complexities impacting back office functions across SMBs, the mid-market, and the Enterprise are accelerating the pace of digital transformation," Hotchkiss wrote in a Friday note. "In particular, while many investment themes across base layer software solutions like CRM & back-office ERP systems are already well understood, we believe that the emerging Software ecosystem being built around base levels of functionality has a significant adoption runway over the long-term as innovations drive incremental productivity gains, creating multi-billion dollar profit pools in various segments of the market," he added. Back-office software company Workiva offers an "increasingly essential" business reporting process for companies navigating a complex regulatory environment, according to the note. Shares of Workiva are down 44% this year. The analyst issued a 12-month price target $101 that represents about 39% upside from Thursday's close of $27.91. "[We] believe Workiva is the most likely company in our coverage to see upward estimate revisions over the next twelve months and least-exposed to downside risk given the platform's non-cyclical utility, growing global TAM, & solution-based pricing model," Hotchkiss wrote. Tax technology software company Vertex has an "underappreciated moat" around its enterprise business, and is positioned for "outsized growth" as it transitions into the cloud market, Goldman said. The stock is up 0.4% year to date. The analyst set a 12-month price target of $20 on Vertex, implying roughly 25% upside from Thursday's closing price of $15.94. "We believe cloud-based new logo growth and migration of existing customers will support a premium cloud revenue growth rate, driving a multiple re-rating over time," read the note. —CNBC's Michael Bloom contributed to this report.