With 2022 coming to a close, many tech-sector investors are looking to put a generally negative year in the rearview mirror and turn their eyes toward 2023.
But, with fears about inflation, rising interest rates and slower spending on technology products unavoidable, analysts at Morgan Stanley are still holding to an it's "always darkest before the dawn" view of what to look for in the coming year.
"It's not surprising investor sentiment is weak and focus sharply narrows onto the risks of weaker spending trends into 2023," said the Morgan Stanley research team led by analyst Keith Weiss. "While fully cognizant of the weakening spending environment, we fear investors may be throwing out the baby with the bathwater."
With that in mind Morgan Stanley said the key for investors looking at the software market will to be nimble and consider larger "enterprise focused" companies with subscription-based revenue models.
For Morgan Stanley, ServiceNow (NYSE:NOW) is its "top pick" due to it being "well-positioned" to consolidate spending within its existing customer base. Weiss' team said, "The nature of the company's subscription model gives us confidence in the durability of growth" and the potential for profit margins to rise in the near term. Weiss has an overweight rating on ServiceNow's (NOW) stock.
Microsoft (NASDAQ:MSFT) also got high marks from Morgan Stanley for being in key software growth areas such as public cloud, data management and security. Weiss said that there remains "strong and durable demand" for Microsoft's (MSFT) offerings and that the company "should [be able to] sustain growth in the commercial business better than investors fear."
Like ServiceNow (NOW), Morgan Stanley has an overweight rating on Microsoft's (MSFT) stock.
Weiss' team was also positive about Palo Alto Networks (NASDAQ:PANW), with an overweight rating and the potential for its current stock price of about $143 a share to double in two years. Morgan Stanley added that if it stays on its current path, Palo Alto Networks (PANW) would be the first cybersecurity-specific software company to reach a $100B market cap.
Morgan Stanley also maintained overweight ratings on Snowflake (SNOW), CrowdStrike Holdings (CRWD), Datadog (DDOG), HubSpot (HUBS), SmartSheet (SMAR), Toast (TOST) and ZoomInfo (ZI).
Earlier this week, Microsoft (MSFT), Snowflake (SNOW) and Datadog (DDOG) also got some praise from J.P. Morgan, which called the three software providers its top picks for 2023 due to a variety of reasons.
