Morgan Stanley says buy 2 beaten-down software stocks. We agree on one of them
The sales in enterprise software stocks, which negatively affected the market for most of last week, started to decrease for some well-established names for the second consecutive session on Monday. Is it time to buy? Morgan Stanley thinks so too; In a note published Sunday, he advises clients of “attractive entry points” at Microsoft and Salesforce, whose shares have tumbled on concerns that artificial intelligence will hurt their businesses. While both Club stocks have posted back-to-back gains, the recent damage has been severe. Microsoft shares have lost 17 percent of their value in the last three months. Salesforce was down nearly 20% during the same period. Concerns about AI among investors are twofold: (1) AI models like Anthropic are getting so good at coding that businesses can use AI to create software themselves rather than paying software companies to do it; and (2) AI tools in enterprise software platforms such as Co-pilot at Microsoft and Agentforce at Salesforce will increase employee productivity so much that businesses will be able to reduce headcount and per-seat licensing needs. Morgan Stanley isn’t worried about the latter. Analysts said the software proves valuable if AI delivers on its promise of improving efficiency well enough to stop seat-based pricing. They later added that it was up to the companies to make adjustments. “Pricing models have changed many times in the past; this is not an existential risk, but represents a potential implementation risk in the form of business model transitions.” Microsoft and Salesforce are strong companies with attractive price-to-earnings multiples and are well-positioned in terms of the companies’ IT spending plans, analysts said. When it comes to the AI coding threat, Morgan Stanley said a company’s decision to develop its own software or work with a Microsoft or Salesforce is crucial. “Software developer productivity has been increasing for decades” as it accelerates with artificial intelligence, analysts said. They added that open source software has been around for nearly 20 years for companies to build their own applications, but still third-party software has “evolved over that time.” In summary, we agree with Morgan Stanley analysts that Microsoft is a buy here. Despite some post-earnings confusion from Microsoft late last month, we maintained our 1 rating on the stock. Note that Microsoft is an enterprise software company with Office and other core suites, but also the world’s second-largest cloud, with the latter being more important from a stock perspective. On Jan. 28 earnings night, Jeff Marks, the Club’s director of portfolio analysis, wrote: “Azure revenue growth in the fiscal quarter technically beat analyst estimates. But investors wanted more growth to justify the 66% year-over-year increase in capital expenditures.” “We’re betting CEO Satya Nadella and CFO Amy Hood will figure this out,” he added. Fast forward to Jim Cramer’s Sunday column – about 1.5 weeks later and plenty of investors selling later – Microsoft’s situation is still murky. Jim took a more pessimistic but resigned view that Microsoft’s problems did not change how much companies liked and used the product. Melius Research downgraded Microsoft to equivalent. Analysts shared some of Jim’s thoughts about Nadella losing the AI narrative and focusing too much on the co-pilot; This doesn’t work either and may need to be free and not paid. At Salesforce, we disagree that the product should be purchased here. This call is easier for us since the Marc Benioff-led company was in the hot seat for a long time before the most recent enterprise software crisis. Last week on “Mad Money,” Jim said cheaper multiples aren’t always the good thing Morgan Stanley points out in its note. “Wall Street is paying less and less for its earnings. The earnings aren’t disappearing, they’re just paying less for them because that’s what you do when you worry about the future,” Jim said on February 3. “The problem with the shrinking price-to-earnings multiple is that you don’t know how low it could go,” he added. The club has a rating equivalent to 2 on Salesforce. (Jim Cramer’s Charitable Trust is long MSFT, CRM. See here for a full list of stocks.) When you subscribe to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trading alert before buying or selling a stock in his charitable foundation’s portfolio. If Jim talked about a stock on CNBC TV, he waits 72 hours after issuing the trading alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, TOGETHER WITH THE DISCLAIMERS. NO CIVIL OBLIGATIONS OR DUTIES EXIST OR SHALL BE RESULTING FROM YOUR RECEIVING ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTMENT CLUB. NO SPECIFIC RESULT OR PROFIT CAN BE GUARANTEED.
