Why Morgan Stanley is slashing price targets on 14 ASX tech stocks

As if the discourse around Australia's embattled tech sector wasn't already negative enough, Morgan Stanley have added more rain to the parade.

After a trip to the mecca of tech companies, San Francisco, Morgan Stanley analysts have downgraded price targets on some of the ASX's biggest tech stocks by as much as 42% due to how markets are underplaying the threat posed by the latest AI models. 

What is most interesting is that some of the biggest downgrades were given to companies that Morgan Stanley believes still have competitive moats, and still retain overweight ratings on. 

But it remains adamant that a seismic paradigm shift is underway, and that investors are behind the curve on how disruptive the shift will be.

“We think the majority of Australia’s sell-side equity valuations (and some on the buy-side) still reflect a time and place before the release of the latest generation of AI coding models," it wrote in the note to clients. 

"The disruption is still relatively early-stage, with more to come. In our view, when the facts change, you need to change.”

It's certainly not the first institution to sound the alarm on AI disruption - the so-called SaaSpocalypse has been the market's new favourite buzzword for weeks at this point - but it does help crystallise the fears many investors have over how tech businesses will operate in the AI era.

According to Morgan Stanley, the task for investors is finding the tech companies with durable competitive moats, can pivot their R&D spending and bring new products to marker faster, and have management teams who understand the need for urgency.

But it also conceded that the landscape is being reshaped, and incumbency now accounts for very little if companies can't adapt.

“We think, in the market’s eyes … everything is ‘contestable’ again," it wrote. "That is, every market leader – be it REA Group as the leading real estate digital platform or WiseTech as the leading global freight forwarding platform – every one of these businesses has to re-establish its leadership strength in this new AI era."

It named REA and CAR as its highest conviction overweights in the sector, alongside WiseTech, Xero and Technology One in terms of pure software plays, even as it acknowledged longer-term outcomes were increasingly hard to predict. 

"We do believe those AU Software & Internet companies that get it, strategise quickly and execute well, do have an opportunity to create meaningful incremental shareholder value, especially from these current lower share price levels (i.e., after sell-off).

The big tech stocks getting downgrades

1. Xero (ASX: XRO) 

• New price target: $130 (42% downgrade)
• Upside potential: 62%
• Rating: Overweight (retained)

2. Pro Medicus (ASX: PME)

• New price target: $200 (37% downgrade)
• Upside potential: 51%
• Rating: Overweight (retained)

3. SEEK (ASX: SEK)

• New price target: $21 (25% downgrade)
• Upside potential: 38%
• Rating: Overweight (retained)

4. WiseTech Global (ASX: WTC)

• New price target: $70 (30% downgrade)
• Upside potential: 61%
• Rating: Overweight (retained)

5. REA Group (ASX: REA)

• New price target: $230 (8% downgrade)
• Upside potential: 39%
• Rating: Overweight (retained)

6. Catapult Sports (ASX: CAT)

• New price target: $5 (23% downgrade)
• Upside potential: 44%
• Rating: Overweight (retained)

7. CAR Group (ASX: CAR)

• New price target: $32 (16% downgrade)
• Upside potential: 30%
• Rating: Overweight (retained)

8. Technology One (ASX: TNE)

• New price target: $32 (6% downgrade)
• Upside potential: 9%
• Rating: Overweight (retained)

Downgrades have also been given to price targets for Airtasker (13% downgrade), Hipages (22% downgrade), Megaport (10% downgrade), Nuix (33% downgrade), PEXA Group (11% downgrade) and Tyro (22% downgrade).