Morgan Stanley said software stocks have become too cheap, naming 8 companies as its highest-conviction Overweight picks. The call comes as the software sector has underperformed broader markets by a wide margin over the past two years.
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Morgan Stanley names 8 software stocks as sector selloff goes too far
Morgan Stanley said software stocks have become too cheap, naming 8 companies as its highest-conviction Overweight picks.
"The market has become too negative on the group," Adam Wood, an analyst at Morgan Stanley, said in a note Tuesday.
The S&P North American Technology Software Index has underperformed the Nasdaq 100 by 40% and the S&P 500 by 30% over the past two years, reflecting growing concern over terminal value. Wood introduced a "Moat & Journey" framework to assess software durability and growth prospects. The eight Overweight-rated picks are Microsoft Corp., Palo Alto Networks Inc., CrowdStrike Holdings Inc., Cloudflare Inc., Datadog Inc., ServiceNow Inc., Snowflake Inc. and Shopify Inc.
Morgan Stanley maintained an Attractive industry view, saying software follows a "buy then build" cycle with infrastructure and cybersecurity already benefiting from the current build phase while applications remain a later-cycle play. The firm outlined 5 major questions shaping the investor debate, including where AI value accrues, whether companies can capture value outside of seats, whether gross margins move structurally lower, whether "going headless" is inevitable and how the end of token subsidization will impact growth.
The firm also assumed coverage of Salesforce Inc. and Intuit Inc. at Equal-Weight, while cutting Adobe Inc. and Workday Inc. to Underweight. Salesforce slid 3.6% on the downgrade, with Wood saying the company is "actively disrupting itself" but has yet to show an inflection in organic growth. Adobe was downgraded due to leadership changes and AI disruption risks, while Workday faces slow-developing AI initiatives.
Wood said the firm tends to agree with the investor perception that the industry has become more mature, but sees more opportunities than investors currently believe. The framework identifies companies with durable competitive advantages and clear growth trajectories that can sustain performance through the AI transition. The picks span infrastructure, cybersecurity and application layers, reflecting the view that value will accrue across the software stack rather than concentrating in a single segment.
The call positions Morgan Stanley ahead of consensus on software at a time when the sector has lagged broader markets by a wide margin. Investors will watch upcoming earnings reports from the named companies for signs of AI-driven acceleration in subscription revenue. The next major catalyst for the group is the Q3 earnings season, which will test whether AI investments are translating into measurable revenue growth.
This article is for informational purposes only and does not constitute investment advice.
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