Morgan Stanley Report Analysis: PE Giants Eye Workday, Software Stocks' Valuations Already Cheap Enough to Tempt Buyers
In a report titled "MStanley Software QuickTake: A Signal to Watch" dated August 16, analysts at Morgan Stanley discuss potential shifts in the software sector, highlighted by rumors of Silver Lake's interest in acquiring Workday. A deal of this scale, valuing Workday at approximately $50 billion, could signal a turning point for private equity (PE) interest. The analysts note that even with a 30-40% premium, the acquisition multiple (around 5x 2027 P/S and 16x 2027 FCF) would be below historical averages, suggesting software valuations may have become attractive enough for PE to re-engage.
The report explores two key areas. First, the dynamic of open-source large language models is creating price stratification, putting pressure on token prices but not necessarily destroying the return on invested capital for major cloud providers, which could remain between 20-60%. Second, a survey of over 150 investors shows a divided but cautiously optimistic short-term view on software stocks, with expectations for greater price dispersion within the sector.
The analysis also touches on specific companies: Netcompany, despite strong revenue growth, faces free cash flow challenges, while the potential acquisition of Cursor by SpaceX is seen as strategically valuable due to its position in the AI-assisted development workflow layer. Overall, the combination of potential PE activity, AI pricing dynamics, and a gradual recovery in investor sentiment points to software sector valuations potentially reaching an inflection point.
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