Morgan Stanley warned investors that upcoming first-quarter earnings from software companies are unlikely to prompt a widespread re-assessment of valuations across the software-as-a-service, or SaaS, sector, even if companies report results above expectations.
In a note authored by analyst Josh Baer, the firm said the market's focus on AI-related disruption to SaaS businesses has pressured sector narratives and multiples for some time. Investors, the bank said, are incorporating risks around competition, business models, margins, and terminal values into current valuations.
No Q1 catalyst, absent clear acceleration
Morgan Stanley explained that while fundamental strength could be rewarded, Q1 does not appear to be the quarter that will deliver a re-rating for SaaS. The bank argued modest quarterly beats or constructive commentary from management teams will not be sufficient to change investor sentiment.
Instead, the note said, what would be required to overturn the AI bear case is clear evidence of revenue acceleration paired with meaningful positive estimate revisions. The team emphasized that the group currently trades at just 2.6 times enterprise value to next-twelve-months sales, implying limited tolerance for incremental upside that falls short of changing the investment thesis.
Stock-level positioning ahead of results
Morgan Stanley highlighted a handful of individual names it prefers heading into the earnings season. The bank flagged Samsara and Box as favored positions ahead of their prints.
On Box, Morgan Stanley pointed to several supporting indicators: leading growth metrics already running in the teens, improving net revenue retention, and a product cycle around Enterprise Advanced. The bank said Enterprise Advanced is producing a 30% to 40% pricing uplift versus Enterprise Plus, which it called the clearest path to sustained double-digit growth in the content and collaboration segment.
For Salesforce, Morgan Stanley noted that consumption of AI features and the Agentforce offering remains at an early stage. The bank suggested that the back half of the year is the more likely timing for a material catalyst for Salesforce, rather than the current quarter.
Regarding Workday, Morgan Stanley said it lacks conviction in the company’s remaining performance obligation guidance given observed weakness in bookings last quarter.
Implications
- The bank expects Q1 results to have limited impact on sector multiples unless accompanied by acceleration and estimate upgrades.
- Valuations for the group are compressed, trading at about 2.6 times EV to next-twelve-month sales.
- Individual company trajectories will be assessed on product monetization and bookings trends, with Box and Samsara singled out as preferred names.
Bottom line
Morgan Stanley’s message to investors is cautious: the market has already baked in significant AI-related uncertainty for SaaS businesses, and only clear, sustained improvements in momentum and analyst estimates will be sufficient to prompt a broad re-rating of the sector.