Goldman Sachs Bullish on These 2 Software Stocks for at Least 50% Upside Potential

Estimated read time 6 min read


We saw something of a rally in the markets last week, but was it just the famous ‘dead cat’ bounce? A look at the charts might suggest that. Since the beginning of April, we seen two short rallies in an otherwise bearish trend – but the second rally was shorter than the first, with a lower peak. Market watchers are starting to wonder if the cat is done bouncing.

So, how can investors ride out this hostile environment?

Goldman Sachs analyst Kash Rangan believes that software stocks, with currently depressed prices and high upside potentials can provide a measure of protection for investors seeking a defensive stance against the larger market downturn.

“While software is late-cycle and investors are rightly wary of relatively unchanged FY forecasts, we revert to our intrinsic analysis as a backstop to the divergence between these companies’ strong business models and current valuations. We maintain our view that profitable growth software can serve as a defensive asset class during challenging economic conditions,” Rangan explained.

Rangan follows up his discussion of ‘defensive’ software stocks with two such picks. As noted, these stocks feature beaten-down share prices but still have plenty of upside potential – in Rangan’s view, better than 50% for the year ahead. Do other analysts agree with Rangan? Let’s take a closer look.

GitLab (GTLB)

The first of these ‘Goldman software picks’ is GitLab, an innovator in DevOps platform development. The company offers business customers an open-source platform for devops work, one that promises to increase speed and efficiency as well as maximizing the end-product’s overall return. GitLab’s innovative insight was to allow users and collaborators to contribute to the planning, building, and deployment of the platform through the open-source model. GitLab offers this basic platform for free to customers, who can also subscribe for access to proprietary upgrades and add-ons.

In the 8 years that GitLab has been open for business, the company has seen its product expand to a wide audience. The firm has over 30 million registered users, representing more than 100,000 companies and organizations. From this base, there are more than 2,000 contributors to the open-source code.

The company went public in October of last year, and closed its first day’s trading at more than $103 per share. The stock has fallen since then, and is down 48% from that opening. The share value decline has come even as the company’s revenues have shown consistent gains in each of its first three public earnings reports.

In those reports, the top line has risen from $66.8 million to $87.4 million. The most recent, for Q1 of fiscal 2023, was up 75% year-over-year. At the same time, the company’s net loss has moderated, from 44 cents per share one year ago to 18 cents in the current report.

Against this backdrop, Goldman’s Rangan lays out an upbeat case for this open-source software firm, writing: “Taking a deeper look into our revenue growth assumptions, we gained confidence in GTLB’s ability to sustain a strong top-line growth rate (of over 38%+ over the next three years) and potentially reach FCF breakeven faster than initially expected (4Q24 vs consensus estimates of 2Q25).”

“In addition to GTLB offering a best-of-breed platform in a large and under-penetrated $40bn TAM, we see the culmination of the following factors driving growth: 1) a steady, elevated NER (>130%) supported by seat expansion and customers coming off of discounted subscription plans 2) an increasing mix of Ultimate as the preferred pricing tier among new customers, and 3) a wider top-of-funnel as companies get comfortable with a streamlined DevOps platform,” the analyst added.

This stance led Rangan to upgrade GTLB shares from Neutral to Buy, and his price target of $80 implies a one-year upside potential of ~51%. (To watch Rangan’s track record, click here)

The bullish Goldman view is no outlier here, as the Strong Buy consensus rating on this stock is unanimous and supported by no fewer than 9 positive analyst reviews. The stock is selling for $53.14 and its $68.88 average price target indicates it has room for ~30% growth in the next 12 months. (See GTLB stock forecast on TipRanks)

Atlassian Corporation (TEAM)

The second Goldman software pick we’re looking at is Atlassian, a company working in the B2B realm. Atlassian offers workplace streamlining software for enterprise customers; the company’s best-known product, Jira, lets managers and workers contribute together to assign, organize, and track workplace tasks. Atlassian offers a range of other workplace software products for a variety of uses in teamwork and collaboration.

The quality and applicability of Atlassian’s products can be seen by a simple tracking of its revenues over the past couple of years. The company has seen the top line grow consistently, in spite of – or perhaps because of – the COVID pandemic. When lockdown policies were in effect, Atlassian’s software, which helped facilitate remote work, found new demand – and kept its expanded customer base.

In its most recent quarterly report, for the third quarter of fiscal year 2022, Atlassian showed $740.5 million at the top line. This was up 30% year-over-year, and a company record for quarterly revenue. The company’s net loss in the recent quarter, at 47 cents per share, was in line with the 48 cents reported in the year-ago quarter.

In recent months, Atlassian has been working to transfer its products, along with new and existing customers, to the cloud, a move that will make it a subscription software company on the SaaS model. Atlassian is pushing the move as an improvement in reliability, security, privacy, and compliance for its customer base.

Atlassian’s applicable products and emerging cloud business, in Rangan’s view, offer a path forward for the company – on a trail that is only beginning.

“With ~226,000 customers and $2.6bn in revenue today, the company has only tapped a fraction of the 2.2mn companies with 10+ knowledge workers and $29bn market opportunity (estimated to grow to $176 by 2025). The availability of a free offering of its products is a competitive advantage for TEAM that allows for steady and strong customer adoption trends with better sales/marketing efficiency,” Rangan explained.

This is another stock that gets an upgrade from the Goldman analyst, who bumps it from Neutral to Buy. Rangan’s $300 price target implies an upside of 60% in the coming year. (To watch Rangan’s track record, click here)

All in all, this software firm has picked up 17 recent analyst reviews, including 12 Buys and 5 Holds, giving it a Moderate Buy consensus rating. The stock’s average price target of $342.87 suggests a one-year upside of ~83% from the current share price of $187.40. (See TEAM stock forecast on TipRanks)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.



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