Morgan Stanley says buy 2 beaten-down software stocks. We agree on one of them

CNBC Finance

4 min read

The selloff in enterprise software stocks that crushed the market for most of last week was abating for the second straight session on Monday for some of the more established names. Is it time to buy? Morgan Stanley thinks so â advising clients in a Sunday note of "attractive entry points" in Microsoft and Salesforce , whose shares have been beaten down on concerns about artificial intelligence hurting their businesses. While both Club stocks were riding back-to-back gains, the recent damage has been severe. Microsoft shares have lost 17% over the past three months. Salesforce has declined nearly 20% over the same stretch. The concern among investors about AI is two-fold: (1) AI models like Anthropic are getting so good at coding that businesses could use AI to create software themselves instead of paying software companies for it; and (2) AI tools within enterprise software platforms such as Co-pilot at Microsoft and Agentforce at Salesforce will improve worker efficiencies so much that businesses can reduce headcount and their need for as many per-seat licences. Morgan Stanley is not worried about the latter. If AI fulfills its promise of improving efficiency so well that the seat-based pricing stops working, it proves that the software is valuable, the analysts said. Then it is up to the companies to adjust, they added. "Pricing models have changed multiple times in the past â this is not an existential risk, but it does represent a potential execution risk in the form of business model transitions." The analysts said Microsoft and Salesforce are well-situated in terms of companies' IT spending plans as strong franchises with attractive price-to-earnings multiples. As for the AI coding threat, Morgan Stanley said a lot goes into a company's decision to develop its own software or work with a Microsoft or a Salesforce. While accelerating with AI, the analysts said, "Software developer productivity has been improving for decades." Open source software, they added, has been around for 20 years for companies to create their own applications â and yet, third-party software has "flourished in that time." Bottom line We agree with Morgan Stanley analysts that Microsoft could be bought here. Despite some post-earnings confusion from Microsoft at the end of last month, we maintained our 1 rating on the stock. Remember, Microsoft is an enterprise software company with Office and other mainstay suites, but also the world's second-largest cloud, the latter being more important to the stock. On Jan. 28, the night of earnings, Jeff Marks, director of portfolio analysis for the Club, wrote, "Azure revenue growth in fiscal Q2 did technically beat analyst estimates. Investors, however, wanted more growth to justify a 66% year-over-year increase in capital expenditures." He added, "We're betting CEO Satya Nadella and CFO Amy Hood will figure it out." Fast-forward to Jim Cramer's Sunday column â about 1Â½ weeks later and a lot of investor selling later â the Microsoft situation remains muddied. Jim took a dimmer but resigned view that Microsoft's problems don't change how much companies like and use the product. Melius Research downgraded Microsoft to a hold-equivalent. The analysts shared some of Jim's views about Nadella losing the AI narrative, and focusing too much on Co-pilot, which isn't paying off, and might need to be free and not paid. On Salesforce, we don't agree that it should be bought here. This call is easier for us as the Marc Benioff-led company has been on the hot seat for quite some time before the latest enterprise software rout. On "Mad Money" last week , Jim said that cheaper multiples are not always the good thing that Morgan Stanley pointed out in its note. "Wall Street's paying less and less for their earnings. The earnings aren't going away, they're just paying less for them, because that's what you do when you're worried about the future," Jim said on Feb. 3. "The problem with a shrinking price-to-earnings multiple is that you don't know how low it can go," he added. The Club has a hold-equivalent 2 rating on Salesforce. (Jim Cramer's Charitable Trust is long MSFT, CRM. See here for a full list of the stocks.) As a subscriber 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 trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

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Morgan Stanley says buy 2 beaten-down software stocks. We agree on one of them

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