5 Software Stocks With Strong Setup Into Q3: Morgan Stanley

Investing.com -- Morgan Stanley has identified several standout performers in the software sector, with companies leveraging artificial intelligence and cloud technologies showing particular strength heading into 2025.

The investment bank’s latest analysis highlights companies that are not only delivering strong current results but are positioned for sustainable growth in the coming years.

Their rankings reflect both financial performance and strategic positioning in high-growth segments of the software market.

Snowflake (SNOW) tops the list with Morgan Stanley projecting 30% product revenue growth in Q3 and Q4 guidance targeting 26-27% year-over-year growth. The company is benefiting from a healthy demand environment in data infrastructure, particularly in core data warehousing.

Despite elevated expectations with shares trading at approximately 15x CY27 revenue, analysts remain convinced about Snowflake’s growth durability through 2025 and beyond, citing strong core business performance and promising new product cycles.

In recent news, Snowflake announced an integration with NVIDIA to accelerate machine learning workflows and made its Snowflake Intelligence agent generally available to its global customer base. The company also reaffirmed its revenue guidance for the third quarter and fiscal year 2026 after an executive made unauthorized statements about future results.

Elastic (ESTC) continues to demonstrate leadership in the AI Search/RAG market according to industry partners. Morgan Stanley sees upside to revenue estimates with a path to 17-18% constant currency revenue growth.

While AI search momentum hasn’t yet fully translated to overall growth, partners note an increasing number of AI Search projects reaching production environments, which should power growth by mid-2026. With stable-to-improving demand and an attractive valuation at approximately 5.0x CY26 sales, analysts view the shares as compelling.

Elastic reported second-quarter revenue growth of 16% year-over-year, beating estimates, and raised its full-year fiscal 2026 revenue guidance. Following the results, several analyst firms, including Scotiabank and Jefferies, lowered their price targets, while Rosenblatt reiterated a Buy rating.

MongoDB (MDB) shows a credible path to 17-18% total revenue growth and 28-29% Atlas revenue growth in Q3. Deal activity improved in Q3, continuing momentum from Q2. While enterprise AI applications remain early-stage opportunities, MongoDB is increasingly attaching to AI use cases with Voyage AI noted as a key differentiator.

The main growth driver remains core operational workloads, particularly in the enterprise segment. Despite a 60%+ share price increase, analysts remain confident in MongoDB’s ability to drive 20%+ growth in Atlas while improving free cash flow.

MongoDB announced that CEO Dev Ittycheria will retire, with Chirantan "CJ" Desai appointed as his successor. Following the leadership transition announcement, several firms, including DA Davidson and BMO Capital, raised their price targets on the company.

GitLab (GTLB) is projected to achieve at least 25-26% year-over-year revenue growth in Q3, approximately 3% above consensus. Morgan Stanley expects FY26 growth to reach 25%, up from previous projections of 23-24%.

Despite stock underperformance (-18% YTD) and investor concerns about competition from AI coding platforms, analysts believe these concerns are overstated. Industry conversations indicate steady performance in Q3 with an attractive estimate setup against a deeply discounted valuation.

Ahead of its third-quarter results, GitLab received reiterated Buy or Overweight ratings from firms including Guggenheim and Piper Sandler. Cantor Fitzgerald also reiterated its rating following stock volatility tied to acquisition rumors.

UiPath (PATH) rounds out the top five with projected ARR growth of approximately 11%. While checks suggest some continued pressure on growth, commentary was positive regarding the company’s agentic portfolio, which has opened more new and upsell opportunities.

However, these opportunities remain largely conversational rather than meaningful deployments. Morgan Stanley maintains an Equal-Weight rating until gaining further clarity on the monetization path for AI-related product offerings.

UiPath recently announced a partnership with OpenAI to develop a ChatGPT connector and an integration with Azure AI Foundry to enhance enterprise automation. Following product updates at its user conference, BMO Capital raised its price target on the company, while Needham maintained a Hold rating.

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