By Wallace Witkowski, MarketWatch
Cloud-software stocks led a tech rally Monday as analysts anticipated a strong showing from Microsoft Corp. and other tech companies set to report earnings amid a pandemic that has shifted many businesses to remote work.
Both the First Trust Cloud Computing ETF /zigman2/quotes/205187458/composite SKYY +2.11% and the iShares Expanded Tech-Software Sector ETF /zigman2/quotes/201870252/composite IGV +1.59% closed 4% higher Monday. Software was the clear driver of tech stocks as the Nasdaq Composite Index /zigman2/quotes/210598365/realtime COMP +0.92% rose 2.5%, while the PHLX Semiconductor Index /zigman2/quotes/210598361/realtime SOX +1.20% gained only 2%. In comparison, the S&P 500 index /zigman2/quotes/210599714/realtime SPX +0.24% advanced 0.8%, and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.13% finished up less than 0.1%.
Microsoft /zigman2/quotes/207732364/composite MSFT +0.64% shares closed up 4.3% at $211.60 ahead of its scheduled earnings report on Wednesday afternoon. The stock is up 34% for the year, while the Nasdaq is up 20%.
Raymond James analyst Robert Majek, who has a strong buy on the stock and raised his price target to $225 from $208, said he expects Microsoft’s quarter to be “driven by the three-headed Hydra in Azure, O365 and gaming, which have all held up well in today’s remote economy and now nearly represent 50% of the company’s revenue.”
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Stifel analyst Brad Reback, who has a buy rating and hiked his price target to $215 from $200, also said that Microsoft stands to benefit from its presence in hyperscale/hybrid cloud, Software-as-a-Service apps, security and gaming as the COVID-19 pandemic continues. The U.S. death toll from COVID-19 rose above 140,000 as infections surged, particularly in hot spots like Florida.
“As the COVID dust settles in coming quarters, we expect organizations of all sizes to sustain accelerated cloud migration strategies and that Microsoft should be a key beneficiary as it taps into Tier-1 workloads that were previously out of reach,” Reback said.
Analysts are excited about software names beyond Microsoft. Shares of Dropbox Inc. /zigman2/quotes/205896836/composite DBX +2.25% surged more than 8% after Jefferies analyst Brent Thill hiked his rating on the stock to a buy, since the company benefits from work-at-home trends and trades at a discount to peers.
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Thill also raised his price target on Atlassian Corp. /zigman2/quotes/207177221/composite TEAM +3.54% to $175, calling the stock a “fundamental rock star with rich valuation.” Atlassian shares rallied 10% to close at $190.32.
“Atlassian is one of the few companies that benefits in the current environment. We will expect an update on what adoption TEAM is seeing in the current remote work environment and whether that is sustainable should things return to normal post COVID-19,” Thill said.
Other big software gainers Monday included Adobe Inc. /zigman2/quotes/200389143/composite ADBE +1.48% with a 5.3% gain, ServiceNow Inc. /zigman2/quotes/202729495/composite NOW +1.59% with a 6.5% gain, Zendesk Inc. /zigman2/quotes/209571012/composite ZEN +0.50% closing up 7.1%, Everbridge Inc. /zigman2/quotes/202832262/composite EVBG +1.77% up 8%, Zscaler Inc. /zigman2/quotes/203585803/composite ZS +1.91% up 6.1%, and Palo Alto Networks Inc. /zigman2/quotes/207599953/composite PANW -0.67% up 4.9%.