The sell-off that gripped enterprise software stocks for much of last week is showing signs of a thaw for some established players, with a second consecutive session of gains on Monday. This has prompted a pivotal question for investors: is it time to step back into the market?
Morgan Stanley, for one, believes it is. In a Sunday note to clients, the firm highlighted what it sees as “attractive entry points” for both Microsoft and Salesforce. These tech giants have recently seen their valuations dented by investor concerns surrounding the disruptive potential of artificial intelligence (AI) on their core businesses.
While both Microsoft and Salesforce are now riding consecutive days of gains, the recent downturn has been significant. Microsoft’s stock has shed 17% over the past three months, while Salesforce has experienced a nearly 20% decline in the same period.
The apprehension among investors regarding AI’s impact on enterprise software is multifaceted. One primary concern is that advanced AI models are becoming increasingly adept at coding. This could empower businesses to develop their own software solutions internally, potentially reducing their reliance on third-party enterprise software providers and their associated licensing fees.
A second, related concern centers on the efficiency gains promised by AI-powered tools integrated within existing enterprise platforms, such as Microsoft’s Co-pilot and Salesforce’s Agentforce. The argument is that these tools could significantly boost worker productivity, leading to a reduction in headcount and, consequently, a diminished need for per-seat software licenses.
However, Morgan Stanley remains unphased by the latter concern. The analysts posit that if AI truly delivers on its promise of enhanced efficiency to the point where seat-based pricing models become less relevant, it simply validates the immense value of the software itself. The onus, they suggest, then shifts to the companies to adapt their pricing and business models accordingly. “Pricing models have evolved multiple times throughout history,” the report states. “This is not an existential threat, but it does represent a potential execution risk during periods of business model transition.”
From a strategic standpoint, Morgan Stanley views both Microsoft and Salesforce as well-positioned within companies’ IT spending priorities, characterizing them as strong franchises trading at compelling price-to-earnings multiples.
Addressing the “AI coding threat,” the firm argues that the decision for a company to build its own software versus engaging with established players like Microsoft or Salesforce involves numerous complex factors. While AI is accelerating development, the analysts note that “software developer productivity has been on an upward trajectory for decades.” Furthermore, they point to the long-standing availability of open-source software, which has empowered companies to develop their own applications for the past two decades, yet the third-party software market has continued to “flourish.”
**Analyzing the Landscape:**
From a commercial and technological perspective, the current market dynamic presents a fascinating case study in innovation adoption and its impact on established business models. The core of the debate lies in whether AI represents a genuine paradigm shift that renders current enterprise software architectures obsolete, or if it is an accelerant that enhances existing platforms and creates new opportunities.
Microsoft’s strength lies not only in its foundational enterprise software suites like Office but, more critically, in its burgeoning cloud infrastructure, Azure. While recent earnings reports showed Azure revenue growth exceeding analyst expectations, the significant increase in capital expenditures to support this growth has left some investors seeking clearer indicators of future returns. The narrative around Microsoft’s AI strategy, particularly its investment in Co-pilot, remains a key focus. The question is whether Co-pilot will become a premium, value-added service or transition to a more widely available, perhaps even free, component of its offerings.
Salesforce, on the other hand, has faced scrutiny for its valuation and growth trajectory even before the broader enterprise software downturn. The market’s current recalibration of multiples for earnings suggests a heightened focus on future growth prospects and the sustainability of current profitability in the face of disruptive technologies. The challenge for Salesforce will be to demonstrate how its integrated platform, powered by AI, can deliver differentiated value that justifies its premium.
Ultimately, the enterprise software sector is navigating a critical juncture. Companies that can effectively integrate AI to enhance their existing offerings, create new value propositions, and adapt their business models will likely emerge stronger. For investors, this period of flux presents both risks and the potential for significant rewards, underscoring the importance of a discerning approach to identifying resilient and innovative industry leaders.
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