Khanchit Khirisutchalual
Tech stocks carried a sell-off in 2022 as investors worried about issues such as rising interest rates, geopolitical upheaval, inflation and prices continuing to rise. But now, investment firm Morgan Stanley says they see “first signs of moderation “in demand for software.
A team of analysts, led by Sanjit Singh, noted that entering the second quarter, the demand picture was healthy. But as the quarter lasts, that doesn’t always happen.
“Entering the [second-quarter] as a result, our channel conversations have picked up signs of slowing demand across the sector, “Morgan analysts wrote. Singh’s team said the outlook was consistent with their recent survey by the chief executive officer of information indicating moderation in expected growth in software budgets for 2022. So far, the downturn is believed to be moderate compared to the first quarter and the environment is still “relatively solid”.
That said, analysts have downgraded several software companies, including Digital Ocean (DOCN), Fastly (FSLY) and New Relic (NEWR), and cited stocks like Appian (NASDAQ: APPN), JFrog (NASDAQ: FROG) and Alteryx (AYX) have “better setups.”
Additionally, the company is long -term bullish on the prospects for Datadog (NASDAQ: DDOG) and Atlassian (NASDAQ: TEAM).
“With the growing signs that the slowdown is starting to materialize, we think the tactical playbook for investors heading into [the second quarter] favors companies that sell primarily to large businesses and operate subscription pricing models, ”said Morgan analysts, who also highlighted opportunities for companies that specialize in multi-year contracts such as ServiceNow ( NOW), Alteryx (AYX), Appian (APPN) and JFrog (FROG).
Morgan Stanley added that companies operating usage-based models with mixed execution track records and outsized risk exposure are considered less favorable, so downgrades to Fastly (FSLY), Digital Ocean (DOCN) and New Relic (NEWR).
Analysts noted that company managers need to think of a way to communicate a potential slowdown to investors but still show that their businesses are strong.
Those seen as the “best position for success” in the second half of the year are likely to be those who can show solid fundamentals with no signs of rising competition or pricing pressure, as well as consideration of a weaker second-half spending environment and providing guidance that does not show “growth is not drastic correction and the model is not de-leveraging significantly.”
Companies like MongoDB (MDB), Salesforce (CRM) and Domo (DOMO) have recently demonstrated these tactics and analysts say Datadog (DDOG), JFrog (FROG) and Alteryx (AYX) are best prepared. “to deliver such a narrative.”
Last month, Goldman Sachs upgraded shares of Atlassian (TEAM), noting that it was gradually becoming more positive as the company reached a “key moment” in its cloud transition.