Barclays initiates coverage of BroadSoft Inc. (NASDAQ:BSFT) at Equal Weight with a price target of $45. Long-term investors stand to be attracted to the company’s large TAM, software-led solutions, and healthy margin. Revenue trends are moderating, though, as service providers pursue big, slow-moving projects. Plus, cloud-based opportunities in unified communications and contact/call centers are stirring up a competitive onslaught. BroadSoft is not sitting idle. A revamped channel strategy could be a nice counter move, but it may take a few iterations to bear fruit, which keeps the firm from becoming more constructive.
BroadSoft targets a combined TAM of $20Bn that could grow double digits over the next few years to approx. $40Bn. This prospect runs in stark contrast to many sub-segments in Barclays's IT Hardware coverage list. The shift from legacy to cloud-based communications underpins the TAM’s attractive growth prospects. This shift also has attracted increasing interest from Amazon AWS, Cisco Spark, Microsoft, RingCentral, 8x8, and others, coming at time when BroadSoft grapples with moderating growth.
The firm estimates BroadSoft can shrug off recent setbacks and claw closer to double-digit Y/Y growth in C2018. A firm crossover to double-digits growth without margin degradation could partially narrow the valuation gap to peers. Currently, BroadSoft trades at 16x C2018 EPS consensus estimate, versus the next-gen communications and data networking comp group averages of 69x and 17x.