PeopleSoft feels market pressure
Shares of the business and financial software maker plunge to a new 52-week low after two investment banks downgrade its outlook.
Morgan Stanley Dean Witter downgraded PeopleSoft to a "neutral" rating from a "strong buy," while and Goldman Sachs lowered it to "market performer" from "recommended."
PeopleSoft's stock closed down 25.19 percent or 8.1875 points to 24.3125 today. Shares of PeopleSoft have traded as high as 57.44 and previously as low as 26.88 during the past 52 weeks.
Morgan Stanley analyst Charles Phillips said he based his decision to downgrade PeopleSoft on the stiff competition the company faces, the severe discounting it has been forced to grant in order to generate sales, and the currently tumultuous market climate. Phillips's report cited a "cacophony of factors" conspiring to cloud PeopleSoft's outlook, including the impact of the Y2K bug, economic concerns over Asia and Russia, and "some deterioration in demand in the financial services sector."
PeopleSoft's primary competitor is SAP, the world second-largest software maker. SAP and other competitors that recently have emerged have been leading the way in slashing their prices to compensate for the worldwide slowdown in license revenue.
In August, SAP announced plans to expand its presence in the United States. Up until that point, PeopleSoft had been chipping away at SAP's lead in enterprise resource-planning software. Phillips wrote that he previously had predicted 46 percent license revenue growth, but recently lowered that figure to 42 percent and 38 percent for the third and fourth quarters, respectively.
His report went on to say that PeopleSoft's key markets--human resources and the public sector--are "under attack," and pointed out that SAP, unlike PeopleSoft, has successfully "targeted those segments."
In some cases, SAP has discounted its contracts in the range of between 60 percent and 80 percent. "SAP can afford to be aggressive in other people's markets since they have a strong installed base locked in their product," Morgan Stanley's research report noted.
Goldman Sachs' Richard Sherlund also downgraded PeopleSoft, noting that the market for enterprise software is likely to shrink as companies cut capital spending in order to grapple with Y2K problems and the repercussions of the Asian crisis. SAP, PeopleSoft, and others are going to be competing for fewer dollars in a tightening market, Sherlund said.
His report noted that PeopleSoft has been "stretching harder at the end of each quarter to make its numbers."
Nevertheless, Morgan Stanley's Phillips sees upside in PeopleSoft's future if the company can make up some of the losses in its license revenue with consulting and training services. But Phillips' report noted that "estimates for 1999 license growth will probably have to moderate and factor in the more severe pricing environment and saturation issues."