It’s Going Be a Tougher Year for Cloud Stocks. Here Are 10 You Can Buy.

That group had a spectacular year in 2020, generating returns that will be tough to match in 2021. Thill notes that as a group software outperformed the S&P 500 by 36 percentage points, the biggest gap in 20 years. Valuations in the group expanded 56% in 2020, after broadening 26% in 2019 and 7% in 2018. Thill thinks the group will outperform again in 2021, driven by strong fundamentals, but he thinks multiple expansion will be limited given the strong recent returns.

In connection with the call, Thill changed ratings on five stocks, moving to Buy from Hold for planning software company Anaplan (PLAN), endpoint security software provider CrowdStrike (CRWD) and cloud monitoring software firm Datadog (DDOG). He raised his target prices for Cloudflare (NET) to $95, from $80; for Datadog to $125 from $105; and for Anaplan to $85 from $70. All three rallied on Monday. (Note that Anaplan also got a ratings boost Monday from Jefferies analyst Brent Bracelin in his own 2021 industry forecast.)

Meanwhile, Thill reduced his ratings on the cloud security vendor Mimecast (MIME) to Hold from Buy and no-longer-obscure-IT management software provider SolarWinds (SWI), the focus of the recent high-profile cyber breach, to Hold from Buy. He trimmed his SolarWinds target to $15, from $18. Both stocks sagged on Monday.

Among large-cap software stocks, his recommendations include Microsoft (MSFT), Salesforce (CRM), Adobe (ADBE), Intuit (INTU), Palo Alto Networks (PANW) and CrowdStrike. His small- and mid-cap picks include Splunk (SPLK), Cloudflare, Varonis (VRNS) and Asana (ASAN).

Thill offers 10 predictions for the enterprise software group for 2021:

• Microsoft continues to aggressively expand Teams, with a big push on collaboration and telephony.
• Intuit should produce the 13th straight year of stock gains “thanks to product and vaccine tailwinds driving up-sells” and a small-business recovery.
• Security spend continues to climb as the severity of breaches increases. “Security remains a quilt of different vendors patched together as no one vendor can protect a full enterprise.” He recommends a basket approach, including CrowdStrike, Palo Alto Networks, Cloudflare, Splunk and Varonis.
• This is the year of work from anywhere: He says collaboration apps like Asana “are mission critical to remote work and productivity and flourish in 2021.” And he thinks Dropbox (DBX) can produce double-digit top-line growth “with significant margin leverage and cash flows.”
• Multiple expansion will be limited in ‘21. Last year “taught us to favor the best fundamental names”—he singles out CrowdStrike, Cloudflare and Datadog.
• Salesforce “will take a breather on large M&A” as it digests Slack (WORK); he thinks the deal will help Salesforce to sell to additional users within the enterprise.
• Adobe “accelerates growth from mid-teens to high-teens.”
• Splunk is “the come-back kid” in 2021. “Expect observability to be top-of-mind among enterprise CIOs and see potential for the space to consolidate in a bigger way.”
• Aggressive platform build-out stories that enable total addressable market (TAM) growth continue to work—he cites Elastic (ESTC) in particular, growing its TAM as well as positive free cash flow.
• Workday and Anaplan “snap back” as back office/middle office takes attention away from the front office. Both “will have easy compares”as they lap soft 2020 results.

In Monday’s trading, Datadog rose 4.3%, Anaplan gained 1.3% and CrowdStrike was up 3.8%. Both SolarWinds and Mimecast were down about 2%.

Write to Eric J. Savitz at eric.savitz@barrons.com