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Morgan Stanley Says Software Selloff Overdone, Names 8 Top AI-Era Picks
Morgan Stanley analysts argue that the recent selloff in the software sector has gone too far, creating opportunities in select stocks. In a note to clients on Tuesday, the investment bank said investor sentiment has become "too negative on the group" and identified eight companies best positioned to thrive in the artificial intelligence era.
A Contrarian Call on Tech
Morgan Stanley's analysis comes after a period of significant underperformance for the sector. The firm noted that the S&P North American Technology Software Index has lagged the Nasdaq 100 by 40% and the S&P 500 by 30% over the past two years, reflecting investor concerns over the industry's terminal value.
Despite this, the bank is pushing back against the prevailing bearishness, maintaining an "Attractive" industry view. Analyst Adam Wood introduced a new "Moat & Journey" framework to assess software companies' durability and growth prospects, concluding that there are "more opportunities than investors currently believe."
Highest Conviction 'Overweights'
Based on its new framework, the firm named eight companies as its "highest conviction Overweights," believing they are well-positioned for the current market cycle. Morgan Stanley highlighted that infrastructure and cybersecurity are benefiting from the current AI "build" phase, while applications represent a later-cycle opportunity.
AdThe top-rated companies are:
- Microsoft (MSFT)
- Palo Alto Networks (PANW)
- CrowdStrike (CRWD)
- Cloudflare (NET)
- Datadog (DDOG)
- ServiceNow (NOW)
- Snowflake (SNOW)
- Shopify (SHOP)
Broader Sector Reassessment
As part of its comprehensive sector review, Morgan Stanley also updated its ratings on several other major software players. The firm initiated coverage of Salesforce (CRM) and Intuit (INTU) with "Equal-Weight" ratings.
Conversely, the bank assigned "Underweight" ratings to Adobe (ADBE) and Workday (WDAY), indicating a more selective approach across the software landscape rather than a broad-based endorsement of the entire sector.
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