After Anaplan’s $11 Billion Private Equity Deal, Are These Small Software Stocks Next?

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Our theme of Mid-Cap Software Stocks – which includes software players that have a market cap of between $2 billion and $10 billion, and have grown their revenues by at least 50% over the last two years, has underperformed considerably. The theme remains down by about 19% year-to-date in 2022. In comparison, the S&P 500 remains down by roughly 6% year-to-date. There are several reasons for the sell-off. With the work-from-home trend of the early pandemic likely to lessen, demand for software tools could ease a bit, impacting growth rates for these companies. For instance, Gartner estimates that enterprise software sales growth will stand at about 11% this year, after growing by over 14% in 2021. [1] Moreover, the Fed has started raising rates, starting with a 0.25% hike last week with potentially larger increases likely in the coming months. Investors had been rotating out of growth stocks for a while now in anticipation of this, and mid-cap software stocks have been particularly badly hit, considering that they trade at high multiples with many names remaining loss-making.

However, we think the theme is worth a look at this point. Although demand growth is likely to slow this year, this is probably being priced in, given that the theme has corrected meaningfully, falling 19% this year to date, and by 10% over 2021. Moreover, the longer-term outlook still remains bright. for the theme. The increasing digitization of business and the economy following Covid-19 is likely to drive information technology spending in the long run, and enterprise software is likely to account for a growing mix of overall IT spending.

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Large investors are also beginning to see value in the beaten-down sector. Earlier this week, private equity company Thoma Bravo agreed to acquire Anaplan stock, a company that provides cloud-based enterprise planning solutions, for $10.7 billion. The deal came at a premium of over 40% from the current market price. For perspective, Anaplan grew its top line by over 33% over Q4 2021, with the stock remaining down by over 45% from its 2021 highs before the deal was announced. It’s possible that we could see more deals such as these in the sector, given that PE funds are sitting on a lot of cash, with the mid-cap software space, with its strong growth and increasingly subscription-based recurring revenue models, appearing to be a good fit for buyouts.

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