Morgan Stanley outlook on the US vertical software industry: Positive prospects before 2025, recommends buying on dips after earnings

According to the recent outlook report on the U.S. vertical software industry released by Morgan Stanley, despite the industry expecting positive development trends by 2025, the financial reports for the fourth quarter of last year were quite complex and challenging. Morgan Stanley remains optimistic about Toast (TOST.US) and CCC Intelligent Solutions Holdings (CCCS.US), advising investors to buy on dips after the earnings reports.

In terms of the macroeconomic situation, the executive orders, tariffs, and trade policies of the new U.S. government are of great concern to investors. Although the business platforms of Lightspeed POS (LSPD.US) and BigCommerce Holdings (BIGC.US) could theoretically be affected by tariffs, Lightspeed's retail customers are primarily small and medium-sized enterprises with limited cross-border transactions, and BigCommerce's business model does not generate meaningful payment revenue streams, which should mitigate the potential impact of tariffs on financial performance. Morgan Stanley's survey also shows that U.S. consumer confidence remains high at the beginning of 2025, with a recovery in dining and travel spending.

Specifically, Morgan Stanley has given restaurant technology company Toast an "Overweight" rating, with a target price of $46. Morgan Stanley expects the company's fourth-quarter financial report to demonstrate sustained growth momentum and upside potential, although management has indicated that moderate margin expansion in the future may lead to preliminary guidance for 2025 being below market expectations. Key growth drivers for the fourth quarter (such as store count, fintech usage rates, and average revenue per user for software) or positive comments on store expansion may drive Toast's stock price up, but Morgan Stanley remains cautious before the guidance for fiscal year 2025 is announced.

Morgan Stanley has given CCC Intelligent Solutions Holdings an "Overweight" rating, with a target price of $15. Morgan Stanley believes that the company's acquisition of EvolutionIQ at the end of 2024 provides compelling growth opportunities, and the addition of workers' compensation/disability insurance business expands the company's potential market size, although integration costs may impact profit margins in 2025.

However, Morgan Stanley believes that the investment themes and valuations of Toast and CCC Intelligent Solutions Holdings remain attractive, and any pullback after the fourth-quarter earnings announcement will present buying opportunities.

Morgan Stanley maintains a "Hold" rating on BigCommerce Holdings, with a target price of $8. The company's stock price has risen 16% over the past three months, slightly outperforming peers, with strong e-commerce demand indicators and holiday spending data supporting its stock price. However, the company performed poorly in the third quarter of last year, and guidance for 2025 may be below market expectations. The company is strengthening its sales organization while also seeking future growth opportunities in B2B, enterprise, and store/multi-brand retail sectors, but the growth prospects for its core business are limited. The company's valuation reflects its lower average profit margins and uncertain growth prospects Morgan Stanley maintains a "Hold" rating on Lightspeed POS with a target price of $18. Morgan Stanley stated that the growth of software revenue and market share acquisition after the strategic transformation still needs to be observed. The company has refocused its strategic emphasis on software sales and accelerated the integration of its payment business. The company primarily focuses on North American retail and the global hospitality industry while reducing investments in North American dining/hospitality and global retail. Management believes this adjustment will bring stronger economic benefits and investment returns, but the market remains cautious. Morgan Stanley noted that the company's current valuation is low, but evidence of performance improvement driven by strategic changes and execution is needed.

Morgan Stanley maintains a "Hold" rating on travel software and technology provider Sabre (SABR.US) with a target price of $4. Morgan Stanley's consumer survey indicates that travel willingness will remain stable over the next six months. Morgan Stanley expects the company's performance in the second half of 2024 to be stronger than guidance, but expresses concerns about the revenue growth needed to achieve the 2025 targets