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.