GMT EIGHT - Research

Evercore: NRG Energy's (NRG.US) stock price hits a new high but is still undervalued; target price raised to $126.

NRG Energy (NRG.US) saw its stock price hit an all-time high on Tuesday, with Evercore ISI raising its target price from $74 to $126 and upgrading its rating from "neutral" to "overweight," believing that the stock is still undervalued compared to its peers even after strong performance in 2024. Evercore analyst Durgesh Chopra stated that NRG Energy's earnings per share growth target exceeds 10% annually, and by 2029, the company plans to return $8.8 billion in capital to shareholders through dividends and buybacks. He added that the company's potential advantages are being underestimated by the market, as NRG Energy is expected to benefit further from increasing electricity demand and higher prices. With the integration of Vivint nearly complete, Chopra stated that the value proposition provided by the business to NRG Energy is evident: since the completion of the transaction in the first quarter of 2023, NRG Energy's customer base has increased by approximately 200,000, revenue per user has increased by about 10%, and already attractive profit margins have further increased by around 100 basis points considering NRG Energy's retention rate of around 90% and optimized pricing strategies, these results should continue to improve. The analyst also noted that NRG Energy announced a partnership with Renew Home and Alphabet Inc. Class C in the third quarter of 2024 to develop a 1 Gigawatt residential VPP in Texas, which will enable NRG Energy to develop energy management solutions for customers through smart thermostats, allowing customers to save money, optimize energy usage, and provide enhanced grid stability.

39 min ago

UBS Group AG: Blackwell's fourth quarter may generate revenue of $9 billion, maintains NVIDIA Corporation's (NVDA.US) target price at $185.

NVIDIA Corporation's stock (NVDA.US) has remained relatively flat since its last quarterly earnings report, but UBS Group AG predicts that the company's revenue from its latest production line will exceed previous expectations due to optimistic sentiment around the Blackwell chip. UBS Group AG analyst Timothy Arcuri has maintained a target price of $185 for NVIDIA Corporation. In a report to clients, Arcuri wrote, "First, we believe that the yield on the Blackwell chip has improved, and the combination of the fourth quarter (January) and the first quarter (April) is rapidly shifting from Hopper to Blackwell." Additionally, based on Foxconn's latest performance, any hardware issues that NVIDIA Corporation may face have recently seen significant improvement as the company is delivering B200 and GB200 processors to partners, with rack deliveries already underway. Arcuri added, "Therefore, we now see revenue from Blackwell in January at around $9 billion (compared to previous expectations of around $5 billion, with supply chain capacity supporting up to $14 billion), but we expect a decline in Hopper in January. We forecast revenue of $42 billion (data center) for the fourth quarter (January) and still $47 billion for the first quarter (April)."

1 h ago

Intel Corporation (INTC.US) announced its performance soon, receiving a rating upgrade from HSBC to "Hold".

HSBC Bank has upgraded its rating on Intel Corporation (INTC.US) from "reduce" to "hold" while maintaining a target price of $20. Intel Corporation is scheduled to announce its financial performance for the fourth quarter of 2024 on January 30. The market generally expects adjusted earnings per share of $0.12 and revenue of $13.83 billion. HSBC believes that Intel Corporation will report performance in line with market expectations. Analysts Frank Lee and Pulkit Aggarwal from HSBC Bank stated in an investor report on Tuesday: "Since Intel Corporation announced its second quarter performance on August 2, 2024, the stock has adjusted by about 26%. We believe that the $20 target has been reached and the current pricing is reasonable. We believe that the market has already absorbed the recent uncertainties related to the execution of the IDM 2.0 strategy and the senior management turnover with CEO Pat Gelsinger resigning in December 2024." Lee said: "As we enter the first quarter of 2025, we anticipate some decline in revenue. Our revenue estimate is $12.6 billion, which implies a 9% decrease from the previous quarter, while the market generally expects a 6% decrease. We believe this may be due to lower-than-expected performance in the data center segment. We expect this could put pressure on the gross margin, so our expectation for a first-quarter gross margin of 38.5% is still below the market consensus of 39.1%." HSBC also noted that Intel Corporation has not provided a clear path to achieve its foundry goals. Lee added: "Although we acknowledge that the worst seems to be over for Intel Corporation and all the negative factors in the past few months seem to be priced in, we believe it is still too early to have a clear view on whether the execution of this plan will bring about a full recovery in the business."

2 h ago

iPhone sales suffered a "Waterloo". Jefferies Financial Group Inc. downgraded Apple Inc. (AAPL.US) to "underperform the market".

Jefferies Financial Group Inc. has downgraded Apple Inc. (AAPL.US) from "hold" to "underperform" and lowered the target price from $211.84 to $200.75. The firm expects that Apple Inc.'s upcoming earnings and guidance will fall short of expectations. Apple Inc. is scheduled to announce its first-quarter earnings after market close on January 30. Analysts led by Edison Lee stated that they have lowered their forecasts due to weak iPhone sales and overall performance in the consumer electronics market, while Jefferies Financial Group Inc. has lowered its expectations for iPhone 17/18 due to the slowing pace of artificial intelligence proliferation and commercialization. Analysts project that Apple Inc.'s revenue growth in the first quarter of the 2025 fiscal year will not meet the expected 5%, and revenue growth in the second quarter will only be in the single digits, lower than expected. Analysts added that the outlook for artificial intelligence is dim, and their industry checks indicate that Apple Inc.'s advanced packaging roadmap for the iPhone may face delays, which is another negative sign. Lee and his team noted that the recent weak sales of iPhones and consumer electronics products are worse than expected, but the iPhone SE4 may drive year-over-year revenue growth in the June quarter. Analysts pointed out that their concerns about weak iPhone demand have become a reality, citing IDC data showing that Apple Inc.'s shipments in the first quarter of the 2025 fiscal year fell by about 4% year-on-year. In addition, Lee added that earnings guidance for the March quarter may also disappoint, and noted that despite optimism about Chinese demand in the market considering government subsidies, the 2025 new policy will limit smartphone subsidies to a maximum of 500 yuan per phone, compared to 1000 yuan in the fourth quarter of 2024, and only covering phones with an average selling price below 6000 yuan, excluding most iPhone models. Analysts also believe that the demand for the iPhone SE4 (equipped with only one camera but featuring Apple Intelligence) may be weaker than expected, as its competitors are likely not Android or iPhone 14 and 15, but rather second-hand iPhone 13/14 pro and pro max. Analysts stated that they have decided to downgrade their rating because they believe that consumers' feedback on smartphone artificial intelligence features, including Apple Intelligence, will continue to remain subdued. According to Counterpoint Research data, iPhone sales in China declined by 18.2% in the fourth quarter of 2024, while the recovering Chinese competitor Huawei took the top spot.

21/01/2025

Not only NVIDIA Corporation (NVDA.US)! Barclays is bullish on these companies leading the AI chip industry in 2025.

Barclays PLC Sponsored ADR predicts that by 2025, Marvell Technology, Inc. (MRVL.US) and NVIDIA Corporation (NVDA.US) will become leaders in the artificial intelligence semiconductor industry. Broadcom Inc. (AVGO.US), Credo Technology (CRDO.US), and the undervalued Lumentum Holdings (LITE.US) are also viewed favorably. Analysts at Barclays, led by Tom O'Malley, stated, "NVIDIA Corporation GPU sales are expected to reach nearly $100 billion in 2024, and are projected to increase to around $160 billion by 2025." "Custom chips are just starting to become increasingly important, and are expected to grow at a faster compound growth rate in the next 3 years (55%). We believe that the scale of the AI TAM is sufficient to support these companies through 2026." Barclays has raised Broadcom Inc.'s target price from $205 to $260; Marvell Technology, Inc.'s target price from $115 to $150; and upgraded Lumentum's rating from "hold" to "buy," with a target price of $125. O'Malley noted, "We are skeptical about Lumentum Holdings' ability to expand its module business to over $10 billion, but the increase in the number of ports, along with a strong desire to use the U.S. supply chain, has accelerated the qualification for mega-scale manufacturers at an astonishing pace." While NVIDIA Corporation is a clear leader in the artificial intelligence semiconductor field, high demand should open doors for other semiconductor companies. O'Malley said, "We do not underestimate NVIDIA Corporation's leading position in the commercial and high-end artificial intelligence computing market, but customers continue to demand second source options and more cost-effective ways to provide delay-intensive artificial intelligence reasoning services to billions of potential users." "We believe that this shift will approximately $21 billion in custom chips flowing to Broadcom Inc. in FY 2026, and nearly $4 billion for Marvell Technology, Inc. in FY 2026. We expect that by the end of this decade, this shift will expand to support our identified $10 billion total asset scale."

20/01/2025

Will Intel Corporation (INTC.US) really be acquired? JP Morgan deeply analyzes the key factors behind the acquisition rumors.

Recently, there have been reports that Intel Corporation (INTC.US) may become a target for acquisition. Morgan Stanley explored Intel Corporation's potential strategic direction in its latest research report, especially in the context of the incoming new U.S. government. Currently, Intel Corporation's credit rating is neutral, with Moody's Corporation rating it as Baa1 with a negative outlook, Standard & Poor's rating it as BBB with a stable outlook, and Fitch rating it as BBB+ with a stable outlook. These ratings are all at the corporate level. Intel Corporation Could Become a Full Acquisition Target In early January, the technology news website SemiAccurate reported that some companies are considering a full acquisition of Intel Corporation, rather than just acquiring certain business segments. The website claimed that its sources confirmed this intention to acquire Intel. SemiAccurate, founded by Charlie Demerjian, focuses on semiconductor, hardware, and network security news. The website accurately predicted Intel Corporation's issues with the 10-nanometer process in 2016, but also incorrectly predicted that Intel would completely abandon the 10-nanometer process. Additionally, SemiAccurate predicted in 2013 that Apple Inc. (AAPL.US) would transition to ARM-based processors by mid-2013, a shift that didn't actually occur until June 2020. Despite this, Morgan Stanley considers SemiAccurate a reliable source of information, although its reports on Intel have been mixed. In fact, Intel Corporation being an acquisition target is not surprising. The company's stock price fell 57% last year, its CEO suddenly resigned, its ratings have been downgraded multiple times, and it is currently undergoing a significant business transformation to become a leading chip design and manufacturing company. Additionally, the possibility of Intel Corporation splitting its business has long been a topic of discussion in the market. Intel Corporation has openly stated that it is looking for buyers for non-core assets such as Altera, and announced this week that it will separate its VCam business, while further legally separating its foundry department. Intel Corporation's Co-CEO Zinsner stated last month that the question of whether to split in the future is still "under discussion." Morgan Stanley believes that due to the capital intensity and execution risks of the 18A process, separating the IFS (Intel Corporation Foundry Services) department alone would be challenging. However, making significant equity investments with large-scale customers or forming partnerships with foundry peers could be an early opportunity for future action. Potential Buyers of Intel Corporation's Business In September 2024, reports surfaced that Qualcomm had approached Intel Corporation for friendly acquisition discussions, although reports in November indicated that Qualcomm's interest had cooled. Among potential acquirers, Qualcomm (QCOM.US) is a possible candidate. Intel Corporation could help Qualcomm diversify its business in the context of its main customer Apple Inc. gradually transitioning to in-house chip designs. However, Qualcomm's CEO has stated that they have not found any large-scale acquisitions necessary for their revenue goals at the moment, although the company remains open to opportunities. Additionally, Broadcom Inc. (AVGO.US) is a frequent player in the semiconductor industry mergers and acquisitions, but as of September 2024, there has been no evaluation of a possible bid to acquire Intel Corporation. Furthermore, there have been reports that U.S. government officials and GFS (GFS.US) recently met to discuss the possibility of cooperation between Intel Corporation and GFS. While acquiring Intel Corporation's foundry department may face funding challenges, GFS, as a U.S. publicly listed company and a "trusted supplier" of the Department of Defense, may have an advantage. However, any acquisition may require additional supporters, stock trading arrangements, and approval from the new government. It is worth mentioning that Morgan Stanley has been asked multiple times about the possibility of Elon Musk acquiring all or part of Intel Corporation's business through his companies (such as Tesla, Inc. (TSLA.US), xAI, or SpaceX). Despite many uncertainties, considering the financial strength of Musk's companies (with SpaceX valued at $350 billion, Tesla, Inc. valued at $1.3 trillion with net cash of $20 billion, and xAI valued at $50 billion), Morgan Stanley believes that any deal involving the wealthiest individual in the U.S. could improve Intel Corporation's credit status. Importance of Intel Corporation to the U.S. Government Concerns about the "Chip Act" have recently garnered market attention, but with Speaker of the House Mike Johnson retracting his comments about abolishing the act, and Secretary of Commerce nominee Howard Lutnick committing to the project, these concerns have been eased. Morgan Stanley expects Intel Corporation, domestic chip manufacturing, or the "Chip Act" to be mentioned in the incoming president's inaugural address, and the new government's focus on domestic manufacturing and supply chain security is expected to increase. Intel Corporation's "Chip Act" funding includes a significant milestone funding of $7.86 billion, a 25% investment tax credit, and...The Ministry of Defense has allocated 3 billion US dollars for the Safe Area Project.Some of the provisions in these funds revolve around the establishment of change control provisions for IFS (Intel Corporation's foundry services), which further reinforces JPMorgan's view: the US government will ensure that any Intel Corporation business divestiture or asset sale will not weaken the financial position of the foundry sector. Conclusion and Outlook JPMorgan believes that the rumors of Intel Corporation's acquisition remind investors of the challenges in credit analysis and recommendations for Intel Corporation, which need to strike a balance between fundamentals (which may be improving) and potential strategic actions. 2025 will be a decisive year for Intel Corporation's foundry plan, with its 18A process node being widely applied to products designed by Intel Corporation. In addition, Intel Corporation's traditional PC chip design business is expected to benefit from the long-awaited PC refresh cycle, but also faces competition from other designers. While S&P and Fitch currently have a stable outlook for Intel Corporation, Moody's may downgrade its rating to the mid-BBB range in the coming months. From a strategic perspective, rumors surrounding potential large-scale mergers have further strengthened Intel Corporation's public plans to monetize at least part of its stake in Altera (according to Bloomberg's mid-December report, Altera's assets are estimated at $9-12 billion). Overall, JPMorgan believes that Intel Corporation's strategic potential and government further support for its manufacturing plans may offset fundamental pressure in the coming months. While Intel Corporation may still face ongoing headline risks, JPMorgan sees no reason to change its positive view on Intel Corporation's foundry joint venture (Foundry JV). JPMorgan believes that the strategic importance of the foundry sector and the contractual protections related to the FABSJV notes make it more attractive. If S&P successfully approves the agreement (expected to end today) and achieves ratings equalization, JPMorgan expects the spread between Intel Corporation and the foundry joint venture to further narrow, with a fair spread of around 15 basis points in the future, rather than the current 35 to 40 basis points.

20/01/2025

Morgan Stanley: Strong Momentum in Generative AI by 2025, Lists MongoDB (MDB.US) as "Preferred"

MongoDB (MDB.US) has been rated as the "top choice" for generating artificial intelligence prospects in 2025 by Morgan Stanley, but Fortinet, Inc. (FTNT.US) has been removed from the "top choice" list for network security stocks due to its stock price increase at the end of 2024. Morgan Stanley analysts, led by Keith Weiss, stated in a report, "From a software analysis perspective, innovation driven by generative artificial intelligence will expand the range of work that can be automated by software, while the underlying input costs for software systemsdata costs, computing costs, and software development costsare decreasing. Increased capacity and decreased input costs are laying the foundation for a broad-based inflationary system, and investors may see momentum within that system start to recover in 2025." Morgan Stanley has a "overweight" rating for MongoDB with a price target of $350. MongoDB is a leading developer data platform that enables developers to build, modernize, and manage applications with software and data. Morgan Stanley noted, "With recent expectations reset, MongoDB will benefit from strong growth in net new applications accelerated by AI-driven code development, increasing cloud migration expectations, and customers desiring standardization with fewer vendors for integration opportunities amid the current pandemic-driven market share gains." The rise of generative artificial intelligence also makes network security a top priority for 2025. Weiss stated, "We believe that recent technological advancements (GenAI, public cloud) expanding the attack surface have created new product opportunities for protecting against AI and leveraging AI automation for security operations, with long-term favorable tailwinds intact." While Morgan Stanley believes Fortinet, Inc. can perform well in 2025, it has removed the "top choice" label. Weiss added, "Considering Fortinet, Inc.'s stock price has risen by 20% since last November, we are removing it from the top choice list for security stocks, but we still have a positive view on the potential for upward revisions throughout the year." Other changes in the report include: Morgan Stanley upgraded Bill Holdings (BILL.US) from hold to overweight, with a price target raised from $95 to $105; downgraded Confluent (CFLT.US) from overweight to hold, with a price target lowered from $33 to $30. Upgraded DigitalOcean (DOCN.US) from hold to overweight, with a price target raised from $40 to $41.

20/01/2025

Next week, aviation stocks will release their financial reports and Bank of America prefers these companies.

Next week, many airline stocks will release their financial reports. Prior to this, Bank of America Corp released a report stating that due to premium income, a rebound in business travel, and the growth of Atlantic China Welding Consumables, Inc. routes, the performance of network airlines will continue to outperform other airlines. The bank also emphasized that domestic capacity in the United States has decreased compared to a year ago, which will bring strong unit revenue improvement for some airlines. Bank of America Corp maintains its "buy" rating for Air Canada (ACDVF.US), Alaska Air Group, Inc. (ALK.US), Delta Air Lines, Inc. (DAL.US), and United Airlines Holdings, Inc. (UAL.US). Network airlines refer to airlines with extensive route networks and strong flight connectivity capabilities. They typically have a large number of flights and destinations globally or in specific regions, providing diverse flight choices and convenient connecting services. Major network airlines in the United States include Delta Air Lines, Inc., American Airlines Group Inc. (AAL.US), and United Airlines Holdings, Inc. Bank of America Corp has upgraded its stock rating for American Airlines Group Inc. from "underperform" to "neutral". The bank believes that American Airlines Group Inc. will benefit from the strong trends mentioned in Delta Air Lines, Inc.'s performance report last week, including robust growth in premium income, recovery in business travel, and growth of Atlantic China Welding Consumables, Inc. routes. Analyst Andrew Didora stated: "Although we expect the Atlantic China Welding Consumables, Inc. routes to only account for 13% of the airline's passenger revenue, compared to over 20% for Delta Air Lines, Inc. and United Airlines, considering the market share losses for American Airlines Group Inc. in the first half of 2024, the company may gain significant benefits from the recovery in business travel." Bank of America Corp has also adjusted its ratings for some airlines. Bank of America Corp has downgraded its stock rating for Southwest Airlines Co. (LUV.US) from "neutral" to "underperform". The bank believes that Southwest Airlines Co.'s profitability remains weak. Analyst Andrew Didora and his team's forecasts are at the lower end of Southwest Airlines Co.'s long-term profit margin target. The analyst pointed out that the current valuation of Southwest Airlines Co. does not fully consider industry changes post-pandemic, such as a shift towards higher premiums, corporatization, internationalization, and cost/profit risks related to changes in Southwest Airlines Co.'s business model. Bank of America Corp also downgraded its stock rating for JetBlue Airways Corporation (JBLU.US) to "underperform". Analyst Andrew Didora stated: "Due to the weak profitability, our forecast for JetBlue Airways Corporation's 2025 EBITDAR (representing earnings before interest, taxes, depreciation and amortization plus other non-recurring income or minus other non-recurring expenses) is about 30% lower than in 2019. We find it difficult to prove that the current valuation is reasonable." The analyst noted that JetBlue Airways Corporation's previous valuation was around 5 to 7 times annual EBITDAR, while the current valuation is over 8 times the expected 2025 EBITDAR.

17/01/2025

Goldman Sachs Group, Inc. outlook on Q4 financial reports of the US automotive industry: mixed performance, supporting General Motors Company (GM.US) while being pessimistic about Tesla, Inc. (TSLA.US)

Goldman Sachs Group, Inc. recently released its fourth quarter financial outlook report for the US automotive and industrial technology industry in 2024. Goldman Sachs Group, Inc. expects the performance of this quarter to be mixed, with some industrial technology companies showing stable performance/guidance, while the performance guidance for several automotive supply chain companies will be weaker. Goldman Sachs Group, Inc. is optimistic about General Motors Company (GM.US), Belden Inc. (BDC.US), and Lantronix, Inc. (FLEX.US), while Magna International Inc. (MGA.US) has a significant amount of business in the European automotive market, which is weaker in terms of trends in that region. Given the strong demand for data centers, improved industrial activity in the US, and potential demand-driving factors such as onshore and large projects, Goldman Sachs Group, Inc. expects companies in the industrial technology sector to announce strong financial reports and guidance. Companies like Vertiv Holdings (VRT.US), Lantronix, Inc., Keysight Technologies (KEYS.US), and Belden Inc. are expected to benefit the most from the trends in the end markets of data centers/industrial sectors. Goldman Sachs Group, Inc. expects the performance of original equipment manufacturers in the automotive sector to be mixed. US automotive sales performed well in the fourth quarter, and Goldman Sachs Group, Inc. believes that the US automotive market will experience moderate growth in 2025, partly due to price decreases. However, international markets are more challenging, with Goldman Sachs Group, Inc. European automotive team forecasting a decrease in European automotive production in 2025. Goldman Sachs Group, Inc. expects that the performance guidance for most automotive Tier 1 suppliers in 2025 will meet or be below market expectations, with Magna being the company with the largest European business among the Tier 1 suppliers covered by the firm. Goldman Sachs Group, Inc. rates General Motors Company as "buy" with a target price of $72; Ford Motor Company (F.US) is rated as "buy" with a target price of $11. Goldman Sachs Group, Inc. expects General Motors Company to have better-than-expected performance and earnings before interest and taxes (EBIT) in the fourth quarter of 2024 and 2025, benefiting from strong US sales data and stable pricing costs. In contrast, weakening international market trends have negatively impacted Ford Motor Company. Goldman Sachs Group, Inc. rates Tesla, Inc. (TSLA.US) as "neutral" with a target price of $345, a 16% decrease from the current level. Goldman Sachs Group, Inc. believes that after the results for 2024 are announced, Wall Street's expectations for Tesla, Inc. will be lowered. They expect Tesla, Inc.'s non-GAAP auto gross profit margin in the fourth quarter to be 15.0%, lower than the 17.1% in the third quarter, and their forecast for Tesla, Inc.'s earnings per share is slightly below Wall Street's. They also believe that the introduction of new car models will result in a 12% growth in Tesla, Inc.'s car deliveries in 2025, lower than Tesla, Inc.'s target of 20-30% growth and below Wall Street's expectations of 14%. Progress in artificial intelligence-related areas at Tesla, Inc., particularly in autonomous driving, Siasun Robot & Automation taxis, and humanoid Siasun Robot & Automation Transformer, may be the focus of this financial report. It is worth noting that in a previously released outlook report for 2025, Goldman Sachs Group, Inc. lowered its forecast for the US electric vehicle market to reflect lower purchase tax offsets and relaxed emission requirements. They expect electric vehicles to account for 8.5% of new car sales in the US in 2025, 25% in 2030, 40% in 2035, and 60% in 2040, lower than the previous forecast of 9%/40%/60%/75%. However, driven by initiatives in Europe and China, Goldman Sachs Group, Inc. still expects double-digit growth in global electric vehicle sales in 2025. Goldman Sachs Group, Inc. sees the complex impact of tariffs. In some cases, tariffs on imports from Mexico and/or Canada are generally unfavorable for US automotive companies and traditional North American automotive OEMs, but tariffs on imported foreign cars will restrict competition/supply. Additionally, tariffs on cars imported from Mexico/Canada may decrease. Goldman Sachs Group, Inc. expects suppliers to seek to pass on higher costs, and widespread tariffs will have a gradual negative impact.

17/01/2025

Morgan Stanley: Composite cycle supports the basic fundamentals of the software industry in 2025. Fortinet, Inc. (FTNT.US) and MongoDB (MDB.US) are the top picks.

Morgan Stanley released a research report stating that after testing investors' patience in 2024, solutions based on generative artificial intelligence seem poised to make progress in 2025. The firm believes that larger consolidators are in a favorable position to accumulate profits and mitigate risks. Their view on the North American software industry is described as "attractive". In addition, Morgan Stanley stated that their top software stock picks are Fortinet, Inc. (FTNT.US) and MongoDB (MDB.US). The firm also adjusted the ratings and target prices of some covered software stocks, including: - Upgrading BILL Holdings (BILL.US) from "hold" to "buy", with a target price raised from $95 to $105; - Upgrading DigitalOcean (DOCN.US) from "hold" to "buy", with a target price raised from $40 to $41; - Upgrading OneStream (OS.US) from "hold" to "buy"; - Raising the target price of Atlassian (TEAM.US) from $259 to $315; - Downgrading Confluent (CFLT.US) from "buy" to "hold", with a target price lowered from $33 to $30; - Downgrading Datadog (DDOG.US) from "buy" to "hold". Morgan Stanley stated that as we enter 2025, two new overlapping cycles are likely to strengthen the fundamentals of the software industry. The first cycle is the software spending cycle, which is currently in a three-year phase of optimization and digestion, laying a solid technological foundation for further growth. Recent surveys of enterprise chief information officers by the firm show that their confidence is rebounding, and broader IT budgets will be healthier. The second cycle revolves around a long-term innovation cycle driven by generative artificial intelligence, and the potential for software to automate a wider range of business and consumer workflows greatly expands future market opportunities. Morgan Stanley stated that the favorable software spending backdrop and the product cycle driven by generative artificial intelligence provide investment opportunities for the entire software industry. The firm's top picks revolve around three broader themes for better risk/reward: (1) Consolidators As enterprises tighten budgets and seek to optimize technology usage, the drive to consolidate spending with fewer vendors intensifies. Using fewer vendors allows for simpler management and higher security, making the economic imperative of driving vendor consolidation more complex. In the firm's view, the drive for vendor consolidation will become increasingly strong in the early stages of generative artificial intelligence, as the value of these solutions is directly related to the breadth of automated workflows and the depth of generative artificial intelligence models using data. Consolidators have the ability to push these high-value solutions to market alongside existing workflows, serving a large group of existing customers with carefully curated datasets and comprehensive management environments. Such software companies include: Salesforce, Inc. (CRM.US), Microsoft Corporation (MSFT.US), Palo Alto Networks (PANW.US), CrowdStrike (CRWD.US), GitLab (GTLB.US), OneStream. (2) Advanced Users With significant product cycle advantages and operational improvements from generative artificial intelligence solutions, the firm believes the potential of this cycle will manifest in different ways, with advanced users increasing revenue and profit margins. The most obvious benefits come from software development, as code generation tools improve developer productivity by 20-40%, and the firm also sees strong potential in digital marketing and customer support. Such software companies include: Shopify (SHOP.US), Atlassian, Workday (WDAY.US), Elastic (ETSC.US), BlackLine (BL.US). (3) Software Companies Focused on Small Businesses As demand improves centered around the US, and risks increase due to rising tariffs and concerns about the persistence of federal spending, software companies focused on small businesses become a relatively safe haven within the software sector. Additionally, considering that one of the fundamental functions of generative artificial intelligence solutions is to accelerate proficiency, small businesses will be the primary beneficiaries of these new features. Such software companies include: Shopify, HubSpot (HUBS.US), Toast (TOST.US), DigitalOcean, BILL Holdings.

17/01/2025

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