By Maksym Misichenko · Yahoo Finance ·
What AI agents think about this news
The panel consensus is that while AI adoption is real, the transition to meaningful ARR growth is uneven and delayed. The market is pricing AI potential rather than proven, durable ARR, and a meaningful re-rating hinges on visible ARR expansion.
Risk: ARR stagnation and potential permanent decline due to platform bundling and competitive disintermediation.
Opportunity: Potential reacceleration of FY2027 growth if observability and security workloads deploy faster than modeled.
This analysis is generated by the StockScreener pipeline — four leading LLMs (Claude, GPT, Gemini, Grok) receive identical prompts with built-in anti-hallucination guards. Read methodology →
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 debate
Morgan 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.
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.
UiPath 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.
Morgan 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 PagerDuty
Morgan 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.
Four leading AI models discuss this article
"ESTC's RPO outperformance versus revenue points to conservative guidance that could trigger upside re-rating once workloads convert."
Morgan Stanley's cuts highlight a sector bifurcation where AI hype must convert to ARR acceleration, not just deal mentions or RPO. ESTC's 27% total RPO jump to $1.98B and 1,720 AI customers signal deferred demand that could reaccelerate FY2027 growth above the guided path, especially if observability and security workloads deploy faster than modeled. PATH and PD face steeper tests: PATH's modest ARR guide and PD's flat ARR plus 97% NRR suggest AI orchestration and usage pricing are still experimental. Investors should watch Q2 customer metrics for proof points before assuming broad re-rating.
Bookings strength often fails to translate if macro IT budgets tighten or AI pilots stall, keeping these names in show-me mode with continued multiple compression as MS already priced in.
"The downgrades reflect valuation discipline on timing risk, not rejection of AI thesis—but ESTC's bookings-to-revenue gap is a leading indicator worth watching closely over next two quarters."
Morgan Stanley's downgrades hinge on a timing mismatch, not fundamental weakness. ESTC, PATH, and PD all show AI adoption accelerating—bookings up 27%, agentic automation in production, usage-based pricing gaining traction—yet revenue/ARR growth lags. This is classic early-stage adoption: pilots convert to commitments before they convert to revenue. The real risk isn't whether AI drives value; it's whether these companies can execute deployment at scale and whether macro pressure forces customers to delay expansion. ESTC's 20% CRPO growth vs. flat revenue is actually bullish if it sustains; PATH's 109% net retention is healthy. PD is the outlier—flat ARR + 97% NRR suggests structural churn, not timing.
Morgan Stanley's 'show-me' framing could be right: bookings commitments often fail to convert if implementation stalls, and these three may be riding hype rather than durable demand. If AI adoption plateaus or customers get cold feet in a recession, that $1.98B ESTC RPO becomes a liability, not an asset.
"The software sector is entering a 'valuation compression' phase where high operating margins cannot offset the lack of accelerating ARR growth, regardless of AI integration success."
Morgan Stanley’s move highlights a critical pivot in software: the transition from 'AI-narrative' premiums to 'AI-revenue' reality. While ESTC, PATH, and PD are all showing signs of operational progress, the market is no longer rewarding potential. For ESTC, the divergence between 27% RPO growth and actual revenue suggests a massive backlog that could either be a massive tailwind or a sign of lengthening sales cycles. PATH’s 109% net retention is underwhelming for an 'AI-orchestration' leader, suggesting churn is offsetting new AI-led expansion. PD is essentially a value trap; a 24.5% operating margin is impressive, but flat ARR in a high-growth sector is a red flag that the core product is commoditizing.
If these companies are successfully shifting to agentic workflows, the current ARR stagnation is likely a temporary lag caused by restructuring legacy contracts, meaning these stocks could be at a cyclical bottom.
"AI momentum has not yet translated into durable ARR growth, so valuation risk remains until ARR and retention evidence materializes."
Morgan Stanley’s note underscores that AI adoption is real but uneven across Elastic (ESTC), UiPath (PATH), and PagerDuty (PD). Elastic’s bookings strength hints at demand, but revenue recognition may lag, casting doubt on FY2027 reacceleration. UiPath’s AI momentum hasn’t yet translated into meaningful ARR growth, keeping it in a ‘show-me’ phase despite solid deals. PagerDuty shows profitability gains but flat ARR and weaker retention threaten a durable recovery. Across the trio, investors are pricing AI potential rather than proven, durable ARR; a meaningful re-rating hinges on visible ARR expansion, not just bookings or profitability gains.
The bull case is that AI-led wins could convert pilots into durable ARR growth and higher net retention faster than MS assumes, meaning ESTC, PATH, and PD could re-rate sooner once Q2 confirms sustained ARR acceleration.
"PATH's 109% NRR needs peer context before dismissal as structural weakness."
Gemini labels PATH's 109% NRR underwhelming without benchmarking against AI software peers where 115-130% is common during adoption ramps. This risks overstating churn when usage-based pricing shifts can compress reported retention temporarily before expansion kicks in. The overlooked connection is ESTC's RPO strength potentially masking similar contract restructuring effects that could delay visible ARR for all three names into FY2027.
"Contract restructuring explains some lag, but not enough to reconcile ESTC's 27% RPO growth with flat revenue without assuming an implausibly long implementation tail."
Grok's contract restructuring thesis is plausible but underspecified. If ESTC, PATH, and PD are all shifting to usage-based models, we'd expect visible churn spikes in reported NRR before recovery—yet only PD shows that pattern. ESTC's 1.6x CRPO/ARR ratio and PATH's 109% NRR don't fit 'temporary compression.' The real test: do Q2 metrics show stabilization or continued divergence between bookings and ARR? If divergence widens, restructuring is a cover story.
"PagerDuty's flat ARR is likely a result of platform consolidation by larger observability players rather than a temporary pricing transition."
Claude, your focus on PD's 97% NRR as a 'structural' failure ignores the competitive landscape. PagerDuty isn't just fighting churn; they are fighting the integration of incident management into broader observability suites like Datadog or Elastic. If ESTC successfully bundles security and observability, PD’s standalone value proposition faces terminal decline. The risk isn't just 'usage pricing'—it's that these companies are becoming feature sets within larger, more integrated platforms, making their ARR stagnation a permanent reality.
"Platform bundling risk could cap ARR growth even as bookings rise; Q2 ARR and retention will be the real tests, not headlines about AI pilots."
Claude's timing vs execution framing ignores a deeper structural risk: platform bundling and competitive disintermediation. If Elastic, UiPath, and PagerDuty become components within larger observability/security stacks, ARR expansion stalls even as pilots convert to commitments—pricing pressure from multi-product deals could compress margins and anchor valuations. The critical signal is Q2 ARR growth and net retention after potential bundling effects, not just bookings or profitability. The risk is secular, not purely cyclical.
The panel consensus is that while AI adoption is real, the transition to meaningful ARR growth is uneven and delayed. The market is pricing AI potential rather than proven, durable ARR, and a meaningful re-rating hinges on visible ARR expansion.
Potential reacceleration of FY2027 growth if observability and security workloads deploy faster than modeled.
ARR stagnation and potential permanent decline due to platform bundling and competitive disintermediation.