‘In GenAI We Trust’: Morgan Stanley Says These 2 Software Stocks Have More Room to Run

After a powerful bullish run through 2023, the stock markets have posted strong gains for the year – with the NASDAQ leading the way. The tech-heavy index is up an impressive 44%, a fact that has drawn investor attention to the tech sector. And much of that attention is focused on AI technology, particularly generative AI.

The GenAI boom got its start in November of 2022, when OpenAI, with backing from Microsoft, launched ChatGPT, its chatbot that makes use of GenAI tech to create original texts in response to user queries, texts that include brief answers to direct questions, short essays, and even longer papers. The success of the chatbot started a new conversation on the possibilities inherent in AI tech, and in the capabilities of GenAI in particular.

Keith Weiss, 5-star analyst from Morgan Stanley, is taking this to one logical conclusion, and is recommending the software segment for investors’ attention – especially those software companies with ties to GenAI. Weiss notes that these firms have done well recently, and are poised for more gains going forward.

“While multiples significantly rebounded in 2023, with the industry on the precipice of the largest innovation cycle in decades, Software’s secular dominance remains firmly intact. Add in improving IT budgets and room for margins, and the sector should continue to be best positioned in ‘24,” Weiss opined.

We can follow Weiss’s tack, and take a closer look at some of his AI-related software picks, stocks that he says have plenty more room to run. We ran these tickers through the TipRanks database to see what other Street experts make of their chances.

Salesforce.com (CRM)

We’ll start with a well-known name in the software world, Salesforce.com. This company works in both tech and marketing, and is well known as a leader in Customer Relationship Management, CRM, from which the company takes its stock ticker symbol. Salesforce’s CRM solutions are cloud-based, offered through the SaaS subscription model, and they include sales, service, and marketing apps.

These services are tailored to the customers’ needs and are scalable to fit enterprise customers of all types, including at least 150,000, and major names such as T-Mobile, Macy’s, Spotify, and Amazon Web Services. Salesforce boasts that its cloud software offerings can be installed and set up without the need for recourse to the IT department. Additionally, all of its product packages integrate AI technology to speed up productivity and efficiency in sales, service, commerce, marketing, IT – in fact, in most segments of the business.

From the customer’s perspective, Salesforce’s platform is highly customizable, making it the right fit for any purpose. The AI integration makes it possible to streamline communications, automate repetitive tasks, and generate actionable insights from customer and marketing data. The more advanced GenAI capabilities create highly personalized marketing messages, and target them to the right prospects at the right time.

And, just in December, Salesforce announced a joint venture with ADP, the human resource firm, to bring generative AI to bear on human capital management solutions, as well as a data cloud vector database that will use AI prompts to unify unstructured data such as PDFs, emails, and transcripts.

In short, Salesforce has made itself essential, and built itself into the go-to place for the best in online marketing and CRM expertise. This has supported the stock, as has Salesforce’s steady stream of highly positive quarterly sales and earnings results. The company showed particularly good results from the recently reported fiscal 3Q24, and the shares jumped 9.1% in response. Overall, CRM shares are up 101% for the year, by this last week of 2023.

In that fiscal third quarter, Salesforce brought in $8.72 billion in revenue, up 11% year-over-year, and in-line with expectations. The firm’s bottom line figure came in at $2.11 per diluted share, by non-GAAP measures – and beat the forecast by 5 cents per share.

For Morgan Stanley’s Keith Weiss, who covers Salesforce, this all gives reason to upgrade the stock from Neutral to Overweight (i.e. Buy), and to give the stock a price target of $350, suggesting a one-year gain of 31%. (To watch Weiss’s track record, click here)

Backing his stance, Weiss notes Salesforce’s outperformance, and its sound use of GenAI, writing, “While CRM shares have outperformed large cap Software peers by >20% in 2023, share price performance has been driven largely by a step function higher in Salesforce’s profitability outlook, with operating margin expansion of >800 bps YoY… Despite what we see as solid (and improving) positioning for Generative AI, the stock continues to trade at a discount to large cap Software peers on a growth-adjusted GAAP earnings basis, with shares trading at a 0.9X PEG ratio against our estimates of a ~33% GAAP EPS CAGR from CY23-CY26. This presents a compelling risk-reward ahead…”

When we zoom out to the Street’s view, we find that CRM shares get a Moderate Buy consensus rating, based on 38 recent reviews that include 26 Buys, 11 Holds, and 1 Sell. (See Salesforce stock forecast)

JFrog (FROG)

The second stock we’re looking at is JFrog, a leader in ‘continuous updates’ and ‘liquid software.’ This company has developed a process for maintaining regular, secure, and seamless software updates, starting from developers’ keyboards and extending all the way to devices. JFrog’s aim is to simplify the software package and installation update process, instilling confidence in users. Their scalable platform makes it easy to deliver upgrades to a wide range of users, from DevOps teams and security professionals to IoT enthusiasts.

This is the digital transformation come home to roost. JFrog makes it possible for millions of developers to make their upgrades as easy as possible for the user – no more restarting your computer in the next 10 minutes. Inspired by a desire to automate this most inconvenient of digital-age chores, JFrog has created a universal, hybrid, multi-cloud platform that will ‘power the next generation of secure software delivery.’

From the user perspective, JFrog’s service enables a direct path from developers through DevOps and security teams straight through to enterprise use. Business clients can keep their own systems maintained with greater speed and efficiency, allowing them to better serve their own customers. And the whole process is invisible across the entire software supply chain.

Since every software user needs access to regular upgrades, JFrog has no shortage of potential customers. This fact underlies the company’s – and the stock’s – strong performance in recent quarters. JFrog reported $88.6 million in revenue for 3Q23, the last quarter reported, a result that was up 23% year-over-year and came in $1.08 million better than expected. The company’s bottom line figure was reported as a non-GAAP diluted EPS of 15 cents; this was 7 cents per share better than had been forecast. The company’s free cash flow for the quarter came in at an impressive $25.4 million. Shares in JFrog jumped some 18% after the earnings release.

We should note here that JFrog has had upwards of half a dozen consecutive quarters of earnings and revenue gains, culminating in the 3Q23 report, and that the company started reporting non-GAAP profits in 3Q22.

Getting to the Morgan Stanely view, we find analyst Sanjit Singh outlining a clear path forward for the stock over the next several years, a path that includes integration of AI tech. Singh says of FROG, “Despite a tough spend environment in recent years, JFrog’s growth has proven more resilient given the key role it plays in securing the software supply chain.. A rebound in software dev projects is likely ahead as enterprises restart transformation initiatives and prioritize building the next wave of AI powered apps… As a play on the volume of software releases, JFrog is a beneficiary and we see such an environment translating to durable 20%+ top-line growth through CY27.”

Putting these comments into a quantifiable stance, Singh rates the stock as Overweight (i.e. Buy), and his $42 price target implies a 21% one-year upside potential. (To watch Singh’s track record, click here)

Wall Street’s consensus view is somewhat mixed on this one. The stock’s rating is bullish – a Strong Buy, based on 10 reviews that break down 8 to 2 favoring Buys over Holds. But the $34.50 average price target suggests a small downside in the coming year – of 0.58% – from the current trading price of $34.70. (See JFrog stock forecast)

To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a tool that unites all of TipRanks’ equity insights.

Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment.