Tech Sector Outlook for 2024: Deutsche Bank’s Positive Projections

The technology sector had an outstanding year in 2023, with a remarkable 56.4% increase in value, playing a pivotal role in the year-end rally for the S&P 500. While such impressive gains might lead some to believe that replicating these results is challenging, Deutsche Bank analyst Brad Zelnick and his team have a different perspective. They anticipate that software stocks, in particular, are poised to outperform in the new year. In this article, we explore the reasons behind this bullish outlook and key stock recommendations from Deutsche Bank for 2024.

Software Stocks: A Focus on Fundamentals

Deutsche Bank’s Brad Zelnick believes that software stocks will continue to outperform, primarily driven by improving fundamentals and positive estimate revisions, rather than significant multiple expansion. Several catalysts support this view, making software stocks an attractive investment opportunity for 2024.

Catalysts for Software Stocks in 2024

1. Efficient Growth: Zelnick points to efficient growth as a key driver. Software companies that can sustain growth while efficiently managing costs are likely to attract investors.
2. Generative Artificial Intelligence: The emerging results of generative artificial intelligence (AI) in practical applications are expected to drive stock performance. As AI technologies mature and find more applications, companies at the forefront stand to benefit.
3. Cloud Marketplaces: The increasing prevalence of cloud marketplaces is another factor. Cloud services have become integral to many businesses, and companies operating in this space may see increased demand for their products and services.
4. M&A Activity: A pickup in merger and acquisition (M&A) activity is anticipated. M&A deals can provide opportunities for companies to expand their offerings, enter new markets, or enhance their competitive positions.

Top Pick for 2024: Salesforce

Among his top picks for 2024, Brad Zelnick highlighted Salesforce. He has set a price target of $330 for Salesforce, indicating a potential upside of over 20% from its closing price. In the early days of 2024, Salesforce’s stock has already gained 4.3%, building on its impressive 98.5% surge in 2023.

Key Factors Driving Salesforce’s Performance

• Subscription Revenue Growth: Zelnick expects Salesforce’s subscription revenue growth to accelerate into the low teens in the coming years. This growth is likely to be supported by factors such as access to trusted customer data, generative AI, pricing strategies, improved execution, and effective capital allocation.
• Generative AI Trend: The analyst considers Salesforce as an “underappreciated AI winner.” The company’s leading brand, ecosystem, and data cloud position it well to capitalize on the generative AI trend.
• Pricing Power: Salesforce is seen as having significant pricing power, which can drive both revenues and margins higher.
• Culture of Execution: A return to a culture of execution is expected to benefit the company’s performance.
• M&A Processes: Salesforce’s disciplined approach to mergers and acquisitions is another factor contributing to its positive outlook.

In conclusion, Deutsche Bank’s positive outlook for software stocks in 2024, with Salesforce as one of its top picks, is grounded in improving fundamentals, the growth potential of generative AI, the expanding cloud marketplace, and expectations of increased M&A activity. While past performance is not indicative of future results, these factors present compelling reasons for investors to consider software stocks as part of their portfolio strategy in the year ahead.