Morgan Stanley said software valuations may have fallen to a level that is starting to attract private equity buyers again.
Reuters reported that Silver Lake is in talks to acquire Workday, and software shares moved higher on the final trading day of last week. In a software roundup published on Aug. 16, Morgan Stanley treated the report as an important read-through for sector valuations.
Workday has a market capitalization of about $50 billion and is a global heavyweight in human capital management and financial management software. Morgan Stanley U.S. software analyst Adam Wood said that if a deal is completed, it would rank among the largest software take-private transactions in recent years. Even assuming a 30% to 40% premium, he said the implied valuation would be only about 5x 2027 price-to-sales and about 16x 2027 free cash flow, both below historical averages. That, in the bank’s view, suggests software names may now be cheap enough to pull PE firms back into the market.
Private equity may be looking at software again
Software privatizations have been limited over the past year. Morgan Stanley said tighter credit conditions and continuing debate around AI have held back confidence in dealmaking.
In Europe, the bank said one of the few notable recent examples was Ridgeview Partners’ roughly £500 million approach for U.K.-based Pinewood Technologies at the end of July. A potential Workday transaction would sit on a completely different scale.
Morgan Stanley laid out two ways to read the reported talks. In the more constructive case, a Workday deal could help restore confidence in software investing for PE buyers, trigger short covering, and support a valuation rebound across the group. Silver Lake’s interest, by itself, indicates that current prices may already look attractive to acquirers. The other message is just as important: even a premium transaction would still clear at multiples below long-term averages, which points to how compressed software valuations have become.
The bank said a formal deal announcement could lead to a broader rerating in software. Short covering and a shift in market thinking around whether these businesses have become too cheap could both contribute.
Open-weight models are pressuring prices, not necessarily returns
Morgan Stanley also flagged another variable shaping the valuation backdrop for software and AI assets: the pricing dynamics around open-weight models.
Stephen Byrd, the bank’s head of thematic and sustainability research, said open-weight models are delivering tangible investment returns and cost savings for users. Pricing trends differ by region. Model prices in China are rising as providers place more emphasis on commercialization, while U.S. vendors are still cutting prices, especially in lower- and mid-tier models.
That is creating a layered pricing structure. Lower-cost models are likely to support high-volume or simpler tasks, while premium models remain aimed at complex enterprise workflows.
Brian Nowak, Morgan Stanley’s head of internet research, said this trend is likely to put pressure on token pricing. Even so, his analysis suggests hyperscalers can still sustain roughly 20% to 60% return on invested capital on owned compute under lower-price assumptions. In other words, a price war does not automatically erase AI profitability for major cloud platforms.
Investors are split, but the short-term tone is still positive
At this week’s “buy the AI dip” webinar, Morgan Stanley surveyed more than 150 investors on whether the recent rebound in software and business services, sectors previously viewed as disrupted, can continue.
Among respondents, 52% said they expect wider price dispersion within the group. About 28% said the rebound is sustainable, while roughly 15% said it is not. Bulls were close to twice as numerous as bears.
The survey did not show unanimous optimism, but it did point to a generally constructive near-term stance on software shares. Morgan Stanley said that kind of setup makes stock selection more important than simple beta exposure.
Netcompany and Cursor offered two more signals
Morgan Stanley also singled out Netcompany and Cursor.
Danish IT services company Netcompany posted second-quarter revenue above expectations, with organic growth of about 17%, well ahead of the industry. Morgan Stanley focused more on earnings quality. Over the past six quarters, free cash flow was negative DKK 192 million, while adjusted net profit reached DKK 935 million over the same period. The bank said the gap was mainly tied to the timing of certain EU and Greek projects, but whether free cash flow turns around in the second half remains a key question.
Based on Thursday’s closing price, Netcompany trades at about 49x 2026 free cash flow and about 19x 2027 free cash flow, according to the report. Morgan Stanley kept its underweight rating.
On Cursor, Morgan Stanley global embodied AI and robotics strategist Adam Jonas examined SpaceX’s $60 billion all-stock acquisition of the company. The bank described Cursor as the workflow layer in AI-assisted software development, routing coding tasks between third-party frontier large language models and its in-house Composer model. It said Cursor is already used by more than 50,000 enterprises, including over 64% of Fortune 500 companies.
Morgan Stanley expects Cursor to reach $8 billion in annual recurring revenue by year-end and about $33 billion by 2030. Within the SpaceX ecosystem, the bank sees Cursor in a core position inside the data-and-deployment layer. As code generation becomes commoditized, value may concentrate in that layer. Morgan Stanley added that its $33 billion revenue forecast for 2030 does not include any synergies.
What ties these signals together
Morgan Stanley’s broader conclusion was that three developments are pointing in the same direction: renewed PE interest in software deals, cost layering driven by open-weight models, and a modest repair in investor confidence. Together, they suggest software valuations have reached a critical level.
In that framing, the real significance of a Workday transaction is not limited to Workday itself. It may signal a turn in how private equity views software assets.
This article is based on a third-party broker report and public market information. The ratings, forecasts, and related views cited here are those of Morgan Stanley analysts and do not constitute investment advice.