The selloff in enterprise software stocks that crushed the market for most of last week eased for a second straight session on Monday for some of the more established names. Is it time to buy? Morgan Stanley thinks so – advising clients in a Sunday note on “attractive entry points” at Microsoft and Salesforce, whose shares have been beaten down by concerns about artificial intelligence hurting their businesses. While both Club stocks posted back-to-back gains, the recent damage has been severe. Microsoft shares have lost 17% in the past three months. Salesforce is down almost 20% over the same period. Investors’ concerns about AI are twofold: (1) AI models like Anthropic are becoming so good at coding that companies can use AI to create software themselves instead of paying software companies to do it; and (2) AI tools within enterprise software platforms such as Co-pilot at Microsoft and Agentforce at Salesforce will improve employee efficiency so much that companies can reduce headcount and their need for the same number of licenses per workspace. Morgan Stanley is not concerned about the latter. If AI delivers on its promise to improve efficiency so well that seat-based pricing no longer works, it will prove the software is valuable, the analysts said. Then it’s up to companies to adapt, she added. “Pricing models have changed several times in the past – this is not an existential risk, but does represent a potential execution risk in the form of business model transitions.” According to the analysts, in terms of companies’ IT spending plans, Microsoft and Salesforce are positioned as strong franchises with attractive price-to-earnings ratios. Regarding the threat of AI encryption, Morgan Stanley says there is a lot to consider when deciding whether to develop its own software or work with Microsoft or Salesforce. As AI accelerated, the analysts said, “Software developer productivity has been improving for decades.” Open source software, they added, has been around for 20 years, allowing companies to create their own applications — and yet third-party software has “flourished in that time.” In short: we agree with Morgan Stanley analysts that Microsoft could be bought here. Despite some confusion following Microsoft’s earnings results late last month, we maintained our 1 rating on the stock. Remember, Microsoft is an enterprise software company with Office and other basic suites, but also the second largest cloud in the world, with the latter being more important for the stock. On January 28, the evening of the earnings results, Jeff Marks, the Club’s director of portfolio analysis, wrote: “Azure’s fiscal second quarter revenue growth technically exceeded analyst estimates. However, investors wanted more growth to justify a 66% year-over-year increase in capital expenditures.” He added: “We’re betting that CEO Satya Nadella and CFO Amy Hood will figure it out.” Fast forward to Jim Cramer’s Sunday column — about a week and a half later and many investors selling later — the situation at Microsoft remains clouded. Jim took a more somber position, but resigned himself to the fact that Microsoft’s problems don’t change the extent to which companies like and use the product. Melius Research has downgraded Microsoft to a hold equivalent. The analysts shared some of Jim’s views on Nadella losing the AI story and focusing too much on Co-pilot, which isn’t paying off and should possibly be free and not paid. As for Salesforce, we don’t agree that it should be purchased here. This call is easier for us because the Marc Benioff-led company has been at the forefront for quite some time before the latest enterprise software route. On “Mad Money” last week, Jim said that cheaper multiples aren’t always the good thing that Morgan Stanley pointed out in his note. “Wall Street is paying less and less for their revenue. The revenue isn’t going away, they’re just paying less for it because that’s what you do when you worry about the future,” Jim said on Feb. 3. “The problem with a shrinking price-to-earnings ratio 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 CNBC Investing Club subscriber 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 charity’s portfolio. If Jim has talked about a stock on CNBC TV, he will wait 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTMENT CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY, ALONG WITH OUR DISCLAIMER. No fiduciary obligation or duty exists nor is it created by your receipt of any information provided in connection with the Investment Club. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Morgan Stanley says it is buying two troubled software stocks. We agree on one of them
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