Tech stocks sold off in 2022 as investors worried about issues such as rising interest rates, geopolitical upheaval, inflation and ever-rising prices. But now investment firm Morgan Stanley has said it sees the “first signs of moderation” in the application for software.
A group of analysts, led by Sanjit Singh, noted that at the start of the second quarter, the demand situation was healthy. But as the quarter progressed, that wasn’t always the case.
” En route to [second-quarter] results, our channel conversations picked up signals of slowing demand in the sector,” Morgan analysts wrote. Singh’s team said this view is consistent with their recent survey of chief information officers which indicated a moderation in the expected growth of software budgets for 2022. For now, the decline is considered modest compared to the first quarter and the environment is still “pretty solid”.
That said, analysts downgraded several software companies, including Digital Ocean (DOCN), Fastly (FSLY) and New Relic (NEWR), and noted that stocks such as Appian (NASDAQ: APPN), JFrog(NASDAQ: FROG) and Alteryx (AYX) have “better configurations”.
Additionally, the company is still bullish on the long-term outlook for Datadog (NASDAQ: DDOG) and Atlassian (NASDAQ: TEAM).
“With growing signs that the downturn is beginning to materialize, we believe the playbook for investors heading into [the second quarter] favors companies that primarily sell to large enterprises and use subscription-based pricing models,” said Morgan analysts, who also pointed to opportunities for companies specializing in multi-year contracts such as ServiceNow (NOW), Alteryx ( AYX), Appian (APPN) and JFrog (FROG).
Morgan Stanley added that companies that use usage-based models with mixed execution histories and outsized risk exposures are seen as less favorable, hence downgrades to Fastly (FSLY), Digital Ocean (DOCN ) and New Relic (NEWR).
Analysts noted that business leaders need to find a way to communicate a potential downturn to investors while showing that their businesses are strong.
Those seen as “best positioned to succeed” in the second half are likely to be those who can show strong fundamentals with no signs of increasing competition or pricing pressures, while factoring in a spending environment. weaker in the second half and giving indications that do not show that “growth is not correcting violently and that the model is not deleveraging significantly”.
Companies like MongoDB (MDB), Salesforce (CRM) and Domo (DOMO) have recently demonstrated these tactics and analysts have noted that Datadog (DDOG), JFrog (FROG) and Alteryx (AYX) are best positioned “to deliver a such story”.
Goldman Sachs last month upgraded Atlassian (TEAM) shares, noting that they are increasingly positive as the company reaches a “pivotal moment” in its journey to the cloud.