By Senad Karaahmetovic
Morgan Stanley analysts took note of "low" investor confidence in software stocks as we approach 2023. The fears of rising interest rates and slowing IT spending have impacted both the investor sentiment and multiples, they wrote to clients in a note.
Still, the analysts remain bullish on the Software sector as they say growth is looking "increasingly attractive" for long-term investors.
"While near-term spending intentions within our CIO survey have definitely weakened, almost 50% of CIOs still expect IT budgets to grow as a % of revenues over the next three years -- and it's not storage and servers driving the increase, software focused projects still dominate the top of the CIO priority," the analysts said.
While the analysts expect "more pain in the very near term" due to negative revisions to topline growth expectations, they also argue that FCF and margins will prove more durable than investors are fearing.
Along these lines, they highlight "stories well able to protect" EPS and FCF, like Microsoft (NASDAQ:MSFT), ServiceNow (NYSE:NOW), Palo Alto Network (NASDAQ:PANW), and Workday (NASDAQ:WDAY).
The analysts also outlined the best high-growth stories for investors with longer time horizons, like CrowdStrike (NASDAQ:CRWD), Datadog (NASDAQ:DDOG), Snowflake (NYSE:SNOW), Toast (NYSE:TOST), and ZoomInfo (NASDAQ:ZI).