:max_bytes(150000):strip_icc()/GettyImages-2194542192-4fe81d0649ec4351a5d00807a399360e.jpg "These 5 Software Stocks Could Double in Price This Year, Says Morgan Stanley")
Key Takeaways
- After last week’s “broad and largely indiscriminate” software sell-off, some stocks within the industry are trading at a more than 50% discount to their fair value, Morgan Stanley analysts wrote in a note on Wednesday.
- Analyst say uncertainty about the future of the industry could continue to be a headwind for stocks without more evidence of AI-driven productivity gains or revenue growth.
Software stocks may be down, but they’re not out, according to analysts at Morgan Stanley.
Shares of software companies have been hammered this year by concerns that AI will upend the industry. The iShares Expanded Tech-software Sector ETF (IGV) has shed more than a fifth of its value since the start of the year, led lower by industry giants Intuit (INTU), ServiceNow (NOW), and Salesforce (CRM).
Investors entered the year worried that increased competition from AI-native startups will pressure incumbents’ profit margins and AI tools will shrink corporate headcount, limiting seat-based revenue growth. Those fears reached a fever pitch last week when the release of AI legal tools by Anthropic sparked a sell-off dubbed “SaaSpocalypse.”
The rout was “broad and largely indiscriminate, with limited differentiation across business models or fundamentals,” wrote Morgan Stanley analysts in a note on Wednesday. That, they say, has created buying opportunities.
Why This Is Important
Uncertainty about AI’s development and the impacts of its deployment has repeatedly rocked the stock market in recent years. Each time investors have shaken off their concerns and driven stock prices higher.
Five software stocks covered by Morgan Stanley could double in value in the next 12 months if AI fears subside and the shares rebound to trade at what the firm says is their fair value. In that group are large caps Intuit and Salesforce, which, respectively, have 101% and 109% upside from Tuesday’s close. Mid caps ServiceTitan (TTAN), CCC Intelligent Solutions (CCC), and Vertex (VERX) should also more than double, according to the analysts.
Plenty of experts have watched this year’s software slump with skepticism. Nvidia (NVDA) CEO Jensen Huang at an event last week called it “illogical” to think that AI will decimate the industry. Jefferies analysts on Sunday said negative sentiment had become “extreme,” and expressed confidence that “nimble” software providers could not just weather disruption, but leverage AI to their benefit.
Investors are increasingly demanding companies demonstrate AI deployments are having a material impact on their finances. Shares of Microsoft (MSFT) and Amazon (AMZN) were hammered after cloud growth—their best proxy for AI-driven growth—came up short in recent earnings reports. Meta Platforms (META) showed AI tools helped to increase ad performance across its social media network, and its stock soared.
Software companies have struggled to convince Wall Street that AI investments are delivering results. Doing so is likely one of the prerequisites of a sustained rebound in share prices, according to Jefferies.
In the meantime, the market for tech stocks is likely to remain turbulent while a cloud of uncertainty looms over software. “As AI model capabilities continue to scale at a non-linear rate, disruption-related volatility is likely to remain a recurring feature,” said Morgan Stanley analysts.
