By: Rita
Reuters reports that PE giant Silver Lake is in talks to acquire Workday, and the software sector surged collectively on the last trading day of last week.
In a software snapshot released on August 16, Morgan Stanley viewed this rumor as a significant signal for software sector valuations. Workday, with a market cap of around $50 billion, is a global giant in human capital management and financial management software. If the deal goes through, it would be one of the largest software privatization deals in recent years. Morgan Stanley's U.S. software analyst Adam Wood pointed out that even calculated with a 30% to 40% premium, the acquisition valuation is only about 5 times the 2027 price-to-sales ratio and about 16 times the 2027 free cash flow, both below historical averages. Software stocks may already be cheap enough for PE to consider re-entering the market.
PE Returns to Software Acquisitions
There have been very few privatization deals in the software industry over the past year.
Morgan Stanley believes that tight credit conditions and ongoing debates around AI have dampened deal confidence. The only noteworthy recent case in the European market was the expression of interest by Ridgeview Partners in acquiring UK's Pinewood Technologies for around £500 million at the end of July. A Workday deal would be on a completely different scale.
Morgan Stanley's analysis unfolds on two levels: In an optimistic scenario, this deal could reignite PE confidence in software investments, triggering short covering and driving a valuation recovery for software stocks. Silver Lake has already indicated with action that the current price level is attractive. Conversely, even at a premium, the multiples remain below historical averages, also indicating that software stock valuations have compressed to levels worth attention.
Morgan Stanley expects that if the deal is officially announced, the software sector will experience a round of valuation re-rating. Short covering and the market's correction in recognizing "these businesses are already too cheap" could drive the overall software sector higher.
Open Source Models Depress Token Prices, But Don't Destroy ROIC
Another variable worth noting comes from the pricing dynamics of open-source weight models.
Morgan Stanley's Head of Thematic and Sustainability Research, Stephen Byrd, noted that open-source weight models are delivering tangible returns on investment and cost savings for users. Chinese model prices are rising as suppliers start to focus more on commercialization; U.S. suppliers are still cutting prices, especially for mid- to low-tier models. A price stratification is forming: cheap models support high-volume or simple tasks, while high-end models continue to serve complex enterprise workflows.
The impact of this stratification on hyperscalers: Open-source models will put pressure on token prices, but analysis by Morgan Stanley's internet research head, Brian Nowak, shows that even under price-cut assumptions, hyperscalers can still maintain a return on invested capital of about 20% to 60% on their own computing power. A price war does not necessarily destroy the profitability of AI for cloud giants.
Investor Divergence on Software Stocks Widens, But Bulls Outnumber Bears
Morgan Stanley surveyed over 150 investors during this week's webinar on "Buying the AI Dip."
When asked "Is the recent rally in previously 'disrupted' sectors like software and business services sustainable," 52% of respondents believed greater price differentiation would emerge within the sector. Approximately 28% of investors considered the rally sustainable, while about 15% deemed it unsustainable. Bulls outnumbered bears by nearly two to one.
The survey shows the market is not uniformly bullish, but the short-term bias for software stocks is overall positive. Divergent expectations mean stock-picking ability will be more important than beta.
Netcompany and Cursor Send Different Signals
Danish IT services company Netcompany reported Q2 revenue exceeding expectations, with organic growth of around 17%, significantly outperforming the industry. However, Morgan Stanley focused more on earnings quality. Free cash flow was cumulatively negative DKK 192 million over the past six quarters, compared to adjusted net profit of DKK 935 million for the same period. While this is mainly attributed to phasing impacts of certain EU and Greek projects, the key is whether FCF can turn positive in the second half of the year. Based on Thursday's closing price, Netcompany trades at about 49 times its 2026 free cash flow multiple and about 19 times its 2027 multiple. Morgan Stanley maintains an Underweight rating.
Regarding Cursor, Morgan Stanley's global Embodied AI & Robotics strategist, Adam Jonas, provided an in-depth analysis of SpaceX's all-stock acquisition of Cursor for $60 billion. Cursor, as an AI-assisted software development "workflow layer," routes coding tasks between third-party frontier large language models and its own Composer model. It is already used by over 50,000 enterprises, covering more than 64% of the Fortune 500. Morgan Stanley expects Cursor's annualized recurring revenue to reach $8 billion by year-end and $33 billion by 2030. Within the SpaceX ecosystem, Cursor holds a core position at the "Data & Deployment" layer. As code generation becomes commoditized, value will accumulate in this layer. Morgan Stanley's $33 billion revenue forecast for 2030 does not yet factor in any synergies.
The return of PE to software acquisitions, the cost stratification from open-source models, and the mild repair of investor confidence—three signals point in the same direction: software sector valuations have compressed to a critical point. Morgan Stanley believes the true significance of the Workday deal lies not in Workday itself, but in the fact that it may mark a turning point in PE's attitude towards software assets.
Disclaimer: This article is an adaptation and interpretation of a third-party brokerage research report (Morgan Stanley, August 16, 2026) by Chaoxiang Research, combined with the compilation of public market information. The ratings, target prices, earnings forecasts, and related judgments cited are the views of the analyst from that brokerage firm, representing only the stance of their institution. They do not represent the views of Chaoxiang Research and do not constitute any investment advice. The market carries risks; decisions must be independent. This article should not be used as a basis for trading any securities.
