The slide in enterprise software stocks that crushed the market for much of last week subsided for a second straight day in some big-name companies in Monday trading. Is it time to buy? Morgan Stanley thinks so, advising clients in a note on Sunday about “attractive entry points” for Microsoft and Salesforce, whose stocks have fallen on concerns that artificial intelligence will harm their businesses. Both club stocks had been on a continuous rise, but the recent damage has been severe. Microsoft stock has fallen 17% in the past three months. Salesforce fell nearly 20% over the same period. Investor concerns about AI are two-fold. (1) AI models like Anthropic will become so good at coding that companies will be able to use AI to write their own software instead of paying software companies. (2) AI tools within enterprise software platforms, such as Microsoft’s Co-pilot and Salesforce’s Agentforce, can significantly improve workforce efficiency and allow companies to reduce the number of employees and the need for per-seat licenses. Morgan Stanley isn’t worried about the latter. Analysts said the software could prove valuable if AI successfully delivers on its promise of improving efficiency and makes seat-based pricing unworkable. After that, it’s up to companies to make adjustments, they added. “Pricing models have changed many times in the past. While this is not an existential risk, it does represent a potential execution risk in the form of a business model shift.” Analysts said Microsoft and Salesforce are well-positioned from a company’s IT spending plan perspective as strong franchises with attractive price-to-earnings ratios. Regarding the threat of AI coding, Morgan Stanley said a lot has to do with a company’s decision to develop its own software or work with Microsoft or Salesforce. “Software developer productivity has been increasing for decades,” analysts said, as the use of AI accelerates. They added that open source software has been around for 20 years for companies to create their own applications, but that third-party software has “risen” in that time. Conclusion We agree with Morgan Stanley analysts that Microsoft could be acquired here. Despite the turmoil following Microsoft’s earnings call late last month, we maintained our stock rating of 1. Remember that while Microsoft is an enterprise software company with Office and other flagship suites, it’s also the world’s second-largest cloud, and the latter is more important to the stock price. On January 28, the night of the earnings release, the club’s director of portfolio analysis, Jeff Marks, wrote, “Azure revenue growth in the second quarter technically exceeded analyst expectations. However, investors were hoping for more growth to justify the 66% year-over-year increase in capital spending.” “I’m confident that CEO Satya Nadella and CFO Amy Hood will figure this out,” he added. Fast forward to Jim Cramer’s Sunday column. About a week and a half later, many investors have since sold, but Microsoft’s situation remains in turmoil. Jim had a bleak, resigned view that Microsoft’s problems didn’t change how much companies liked and used the product. Melius Research downgraded Microsoft to Hold status. Analysts shared some of Jim’s views that Nadella has lost the AI narrative, is too focused on co-pilots, is underperforming, and may need to be made free without pay. Regarding Salesforce, I don’t agree that you have to buy it here. This call is easy for us because the Marc Benioff-led company has been in the spotlight for quite some time, even before its latest enterprise software debacle. Last week on “Mad Money,” Jim said that cheap multiples aren’t necessarily a good thing, as Morgan Stanley pointed out in a note. “Wall Street is paying less and less for its earnings. It’s not that there’s no revenue, it’s just that it’s paying less. That’s what you do when you’re worried about the future,” Jim said on Feb. 3. “The problem with falling price-to-earnings ratios is we don’t know how far they will fall.” This club has a Hold equivalent rating of 2 on Salesforce. (Jim Cramer’s Charitable Trust is long MSFT, CRM. See here for a complete list of stocks.) As a subscriber to Jim Cramer’s CNBC Investment Club, you will receive trade alerts before Jim makes a trade. After Jim sends a trade alert, he waits 45 minutes before buying or selling stocks in his charitable trust’s portfolio. If Jim talks about a stock on CNBC TV, he will issue a trade alert and then wait 72 hours before executing the trade. The above investment club information is subject to our Terms of Use and Privacy Policy, along with our disclaimer. No fiduciary duties or obligations exist or arise from your receipt of information provided in connection with the Investment Club. No specific results or benefits are guaranteed.
