Morgan Stanley updated its outlook on three software stocks following earnings, highlighting how differently AI adoption is impacting companies across the sector.Morgan Stanley believes investors are increasingly focused on companies that can use AI to drive durable revenue growth; for example Elastic N.V. (ESTC), UiPath (PATH), and PagerDuty (PD) all reported results that largely met or exceeded expectations.Elastic’s bookings strength is creating a new debateMorgan Stanley maintained its Equal Weight rating on Elastic and cut its price target from $80 to $73 (current share price of $65), arguing that strong bookings and growing AI adoption are helping strengthen the company’s growth outlook.Elastic delivered one of the more interesting quarters in the group because bookings growth significantly outpaced reported revenue growth. In the fourth quarter, current remaining performance obligations rose 20% to $1.2 billion, while total RPO climbed 27% to $1.98 billion, signaling that customer commitments are building faster than revenue recognition.AI adoption also continued to move in the right direction. The number of customers with annual contracts worth more than $100,000 using Elastic’s AI capabilities climbed to more than1,720, up from roughly 1,660 in the prior quarter, while the company reported a record number of $1 million-plus deals.
Elastic’s backlog is growing much faster than revenue, signaling strong customer demand and putting the spotlight on how quickly those commitments convert into sales.fotograzia via Getty Images
Morgan Stanley noted that bookings strength was broad-based across search, security, and observability.However, they expect investors will likely want proof that AI demand is translating into deployed workloads and recognized revenue before the stock trades at a higher multiple.UiPath still needs AI demand to show up in annual recurring revenue.Morgan Stanley maintained its Equal Weight rating on UiPath and lowered its price target to $15 from $17 (current share price of $12), arguing that AI momentum is improving but has yet to show up in recurring revenue growth.UiPath delivered solid first-quarter results, with revenue rising 17% year over year to $418 million and operating profit coming in ahead of expectations. Management said AI was included in 16 of the top 20 deals during the quarter, while AI-led expansion deals were materially larger than traditional expansion opportunities. Morgan Stanley noted that agentic automation appears to be moving from experimentation into production environments.Trending Stock News:Morgan Stanley resets MongoDB stock price target after earningsAnalog Devices CEO drops bombshell message on exploding AI infrastructure demandCisco CEO predicts AI will force multi-billion dollar infrastructure resetUiPath is increasingly positioning itself as the orchestration layer connecting agents, robots, APIs, systems, and humans. Customer metrics also improved, with dollar-based net retention rising to 109%, $100K+ ARR customers growing 11% to 2,624, and $1 million+ ARR customers increasing 18% year over year to 374.The issue is that recurring revenue has yet to fully reflect that momentum. FY2027 ARR guidance increased only modestly to $2.058 billion to $2.063 billion, leaving Morgan Stanley cautious that stronger AI adoption has not yet translated into a meaningful acceleration in committed subscription growth. The firm said the stock remains in a “show-me” phase until AI momentum begins flowing through to ARR growth.PagerDuty also remains a “show-me” story.Morgan Stanley maintained its Equal Weight rating on PagerDuty and issued a $7 price target (current share price of $10). The firm said the quarter was a step in the right direction, but the company still needs to prove it can stabilize growth and improve retention trends.First-quarter revenue grew 1% year over year to $121 million, while operating margin reached 24.5%, helping management raise FY2027 EPS guidance to $1.30. The company also added more than 600 new customer logos for the fifth consecutive quarter.Related: JPMorgan resets Dell stock price target after earningsMorgan Stanley highlighted several areas that could support a recovery. Usage-based pricing continues gaining traction, multi-year agreements are helping improve renewals, and management believes customer engagement efforts are beginning to stabilize retention trends.The challenge is that growth remains low. ARR was essentially flat year over year, dollar-based net retention slipped to 97%, and seat compression continues to weigh on expansion activity. Morgan Stanley believes PagerDuty is moving in the right direction, but the company still needs to prove it can restore durable growth before investors are willing to assign a higher valuation.Key takeaways about Elastic, UiPath, and PagerDutyMorgan Stanley’s latest software review suggests investors are becoming more selective about which companies can become AI winners.Elastic continues to see strong customer demand, with bookings growth significantly outpacing revenue growth. However, Morgan Stanley cut its price target to $73 from $80 because FY2027 guidance assumes growth reaccelerates despite recent revenue deceleration.UiPath remains one of the more interesting AI automation stories in software. Morgan Stanley lowered its price target to $15 from $17, arguing that improving AI adoption and stronger customer metrics still need to translate into a more meaningful acceleration in ARR growth.PagerDuty remains the most challenged of the three names. While profitability improved and management pointed to signs of stabilization, Morgan Stanley’s $7 price target reflects concerns that flat ARR growth, weakening retention metrics, and ongoing seat compression continue to weigh on the business.Related: Rocket Lab adds $5B in market cap on major industry news