Written by: Rita

Reuters reports that PE giant Silver Lake is negotiating to acquire Workday, with the software sector rising collectively on the last trading day of last week.

On August 16, Morgan Stanley's software snapshot regarded this rumor as an important signal for the valuation of the software industry. Workday has a market capitalization of about $50 billion and 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 transactions in recent years. Morgan Stanley's U.S. software analyst Adam Wood pointed out that even with a premium of 30% to 40%, the acquisition valuation would only be about 5 times the 2027 revenue multiple and about 16 times the 2027 free cash flow, both of which are below the historical average. Software stocks may have become cheap enough for PE to return to the table.

PE Returns to Software Acquisitions

There have been very few privatization transactions in the software industry over the past year.

Morgan Stanley believes that tightening credit conditions and the ongoing debate surrounding AI have suppressed confidence in transactions. The only noteworthy recent case in the European market is Ridgeview Partners' acquisition intention for the UK's Pinewood Technologies for about £500 million at the end of July. The scale of the Workday transaction is entirely different.

Morgan Stanley's analysis has two layers: in an optimistic scenario, this transaction could reignite PE's confidence in software investments, prompting short covering and driving software stock valuations upward. Silver Lake has shown through actions that current price levels are attractive. However, conversely, even with a premium acquisition, the multiples are still below historical averages, also indicating that software stocks' valuations have compressed to a level worth noting.

Morgan Stanley expects that if the transaction is officially announced, the software sector will experience a round of valuation reevaluation. Short covering and the market's correction of the perception that "these businesses are too cheap" may push software stocks overall higher.

Open Source Models Pressure Token Prices, But Do Not Destroy ROIC

Another variable worth noting comes from the pricing dynamics of open-source weight models.

Morgan Stanley's head of theme and sustainability research Stephen Byrd points out that open-source weight models are allowing users to achieve tangible investment returns and cost savings. Prices for Chinese models are rising, and suppliers are beginning to place more emphasis on commercialization; American suppliers are still lowering prices, especially in the mid to low-end models. A price stratification is forming: cheap models support high capacity or simple tasks, while high-end models continue to serve complex enterprise workflows.

This stratification affects hyperscale vendors: open-source models will put pressure on token prices, but Morgan Stanley's head of internet research Brian Nowak's analysis shows that even under price reduction assumptions, hyperscale vendors can still maintain about 20% to 60% returns on invested capital on their own computing power. Price wars do not necessarily destroy the AI profitability of cloud giants.

Investor Divergence on Software Stocks, But Bulls Outnumber Bears

Morgan Stanley surveyed over 150 investors in this week's "Buying the Dip in AI" webinar.

When asked whether the recent rebound in previously "disrupted" sectors such as software and commercial services is sustainable, 52% of respondents believe there will be greater price differentiation within the sector. About 28% of investors believe the rebound is sustainable, approximately 15% believe it is not, with bulls nearly double the bears.

The survey shows that the market does not unanimously anticipate bullish conditions, but the overall short-term direction for software stocks is positive. The expectation of differentiation means that stock selection ability will be more important than beta.

Netcompany and Cursor Each Signal

Denmark's IT service company Netcompany's Q2 revenue exceeded expectations, with organic growth of about 17%, significantly outperforming the industry. However, Morgan Stanley is more concerned about profit quality, as free cash flow has accumulated to a negative DKK 192 million over the past six quarters, with an adjusted net profit of DKK 935 million during the same period. While this is mainly due to phase effects from certain EU and Greek projects, whether FCF can turn positive in the second half of the year is crucial. Based on Thursday's closing price, Netcompany's 2026 free cash flow multiple is about 49 times, and about 19 times for 2027. Morgan Stanley maintains a downgrade rating.

Regarding Cursor, Morgan Stanley's global AI and robotics strategist Adam Jonas deeply analyzed SpaceX's all-stock acquisition of Cursor valued at $60 billion. Cursor, as the "workflow layer" for AI-assisted software development, routes coding tasks between third-party cutting-edge large language models and its own Composer model, used by over 50,000 enterprises covering more than 64% of the Fortune 500. Morgan Stanley expects Cursor's annual recurring revenue to reach $8 billion by the end of the year and about $33 billion by 2030. Within SpaceX's ecosystem, Cursor plays a core role in the "data and deployment" layer; once code generation becomes commoditized, value will concentrate at this layer. Morgan Stanley's $33 billion revenue forecast for 2030 has not factored in any synergies.

The return of PE to software acquisitions, the cost stratification of open-source models, and the moderate restoration of investor confidence point in the same direction: the valuation of the software sector has been compressed to a critical point. Morgan Stanley believes the true significance of the Workday transaction lies not in Workday itself, but in how it may mark a turning point in PE's attitude towards software assets.

This disclaimer is a compilation and interpretation of the third-party brokerage research report (Morgan Stanley, August 16, 2026) by Chaoxiang Research, combined with public market information. The ratings, target prices, earnings forecasts, and related judgments quoted in the text are the opinions of the brokerage analysts and represent only the stance of their respective institutions, not the views of Chaoxiang Research, nor do they constitute any investment advice. The market carries risks, and decisions should be made independently. This article should not be used as the basis for buying or selling any securities.