These 5 Software Stocks Might Double in Value This Year, According to Morgan Stanley

Key Insights

Analysts at Morgan Stanley highlighted on Wednesday that certain stocks in the software sector are priced at over a 50% discount compared to their fair value after last week’s extensive sell-off of software assets.

They also pointed out that continued uncertainty about the industry’s trajectory might hinder stock performance unless there’s solid evidence of productivity gains or revenue increases driven by AI.

According to Morgan Stanley, while the decline in software stocks might not be over, there’s still potential for recovery.

This year, software stocks have significantly dropped amid fears that AI might disrupt various sectors. For instance, the iShares Expanded High-Tech Software Sector ETF (IGV) has seen its value decline more than 20% since the start of the year, with major players like Intuit, ServiceNow, and Salesforce suffering the most.

Earlier in the year, investor apprehension grew regarding how AI-native startups could tighten the margins of established companies, coupled with concerns that AI tools could decrease workforce numbers and limit revenue growth per seat. The anxieties peaked over the past week when the launch of an AI legal tool by Anthropic initiated a sell-off that some labeled the “SaaSpocalypse.”

Morgan Stanley analysts noted that the market reactions were “broad and largely indiscriminate, with limited differentiation between business models and fundamentals,” suggesting a potential buying opportunity.

Why This Matters

The ongoing uncertainty surrounding AI’s development and its effects has consistently unsettled the stock markets in recent years. Nonetheless, investors have often shrugged off their worries, leading to price increases.

The five software stocks evaluated by Morgan Stanley might see their values double in the next year if AI-related worries diminish and if they return to their stated fair value. This selection includes large-cap stocks Intuit and Salesforce, which have seen substantial increases, up 101% and 109%, respectively, since Tuesday’s closing prices. Analysts anticipate that mid-cap stocks like ServiceTitan, CCC Intelligent Solutions, and Vertex could also more than double in worth.

Many industry specialists have expressed skepticism about the software sector’s downturn this year. For example, NVIDIA CEO Jensen Huang remarked last week that the idea of AI disrupting the industry is “illogical.” Analysts from Jefferies stated that negative sentiment in the market has reached an “extreme” point, while expressing optimism that adaptable software providers can not only manage the disruption but also harness AI to their advantage.

More and more, investors are looking for concrete evidence that companies’ AI implementations are yielding substantial financial outcomes. Following recent earnings reports that fell short of expectations for cloud growth—crucial for AI-driven expansion—Microsoft and Amazon saw their stocks decline. Conversely, Meta Platforms demonstrated the effectiveness of its AI tools in enhancing ad performance on its social networks, which boosted its stock price significantly.

Nevertheless, software companies are struggling to convince Wall Street that their investments in AI are translating into tangible results. According to analysts at Jefferies, this need for proof is likely a prerequisite for any sustained recovery in stock values.

For now, the tech stock market remains turbulent, clouded by uncertainty in the software sector. Morgan Stanley analysts noted that as AI models’ capabilities continue to evolve rapidly, volatility due to disruption is expected to persist.