Why Goldman Sachs is now super bullish on Microsoft and Salesforce

Brian Sozzi
·3 min read

With broader tech stocks being slammed this past month — and some best in breed names feeling the pain as well — Goldman Sachs is drawing a line in the sand and saying it's time to buy.

At least it's time to buy two of the most well-known tech stocks around: Salesforce (CRM) and Microsoft (MSFT).

"While valuations remain elevated, with the average company in our coverage trading at ~17x EV/Sales, we see room for outperformance with 49% and 36% upside to our Salesforce and Microsoft price targets respectively, particularly as we view both companies as well positioned to capitalize on DX spending, which has been accelerated in the wake of the COVID-19 pandemic," said Goldman Sachs analyst Kash Rangan, putting both stocks on the investment bank's closely watched "Conviction Buy" list.

Rangan sees both tech giants benefiting from the shift to cloud services and a picked up pace of corporate investment spending as the pandemic slowly begins to move into the rearview mirror.

"With a strong presence across all layers of the cloud stack, including applications, platforms, and infrastructure, Microsoft is well positioned to capitalize on a number of long-term secular trends, including public cloud and SaaS adoption, digital transformation, AI/ML, BI/analytics, and DevOps (amongst others). We see a pathway for sustained double-digit top line growth alongside continued margin expansion, particularly as the Commercial Cloud business continues to grow as a percentage of the overall mix," Rangan said of Microsoft.

Rangan sees fair value for Microsoft of $315 a share, up 39% from Monday's closing price.

The sentiment was somewhat similar on Rangan's call for Salesforce, though it's more valuation based than Microsoft. Salesforce shares have been penalized in the market since announcing it would acquire Slack in late November.

The logo of Microsoft is displayed outside the headquarters in Paris, Friday, Jan. 8, 2021. As the pandemic raged through the U.S., Microsoft's business continued chugging ahead and beat Wall Street expectations for the last three months of 2020, powered by ongoing demand for its workplace software and cloud computing services as people worked from home. The company on Tuesday, Jan. 26, 2021 reported fiscal second-quarter profit of $15.5 billion, up 33% from the same period last year. (AP Photo/Thibault Camus, file)
The logo of Microsoft is displayed outside the headquarters in Paris, Friday, Jan. 8, 2021. (AP Photo/Thibault Camus, file)

Explains Rangan, "We believe investor sentiment continues to remain muted as investor concerns regarding the pace of margin expansion, organic growth of the core business, and potential dilution from further M&A continue to weigh on the stock. Salesforce is trading at a sizeable discount to the group and the lowest EV/Sales multiple of all the large-cap software names under coverage. We continue to see risk/reward as attractive at current levels, and are adding CRM to our regional conviction list as we continue to see the company as well positioned to capitalize on digital transformation, sustaining organic high-teens growth."

Rangan also set his Salesforce price target at $315, or 52% above current trading levels.

Goldman's bold calls on Salesforce and Microsoft are a shot across the bow at tech bears, which have increased in number in recent weeks as the Nasdaq Composite has come under considerable pressure.

The Nasdaq Composite fell 2.4% on Tuesday amid continued pressure from rising 10-year yields. That extended its decline from its Feb. 12 record high to 10%, putting it in correction territory. Shares of software companies have been especially hard-hit during the sell-off — Microsoft and Salesforce were down 6.2% and 13%, respectively, in the past month before Goldman's bullish note Tuesday.

At least for today, Goldman's calls suggest it may be time to go shopping in Big Tech.

Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn.

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