Under the panic of software stocks, can SAP's earnings report stabilize the market this week?

Against the backdrop of a sharp sell-off in European software stocks and widespread price weakness in the sector, the market is eagerly seeking a "stabilizing force" to calm emotions. Morgan Stanley pointed out that as the fourth quarter earnings season of 2025 begins, whether SAP, Europe's largest software company, can deliver a satisfactory report on Thursday will become the focus of the market this week.

According to the Wind Trading Desk, Morgan Stanley analyst Adam Wood's team released a report on January 25, stating that despite ongoing concerns about generative artificial intelligence (GenAI) casting a shadow over the market and leading to fragile investor sentiment, core software companies are still expected to report robust fourth-quarter data. The firm anticipates that companies will issue guidance for fiscal year 2026 that meets expectations, and management will convey confident signals, but whether this will be enough to build a bottom for stock prices in the short term remains to be seen.

Previously, according to an article from Wall Street Insight, Barclays analysts pointed out as early as November 18 that the earnings season is unlikely to become a positive turning point for market sentiment. Currently, investors are facing two major challenges: one is the "AI overhang," where the market is extremely concerned that the disruptive power of AI will undermine the competitive moat of existing application software companies; the other is that the capital expenditures of large-scale cloud service providers to support AI development are at unsustainable high levels.

In addition to the core software sector, the divergence in the payment and fintech fields is also intensifying. Morgan Stanley noted that despite the challenging macro environment, companies with structural growth advantages, such as Wise, have shown signs of acceleration, while companies facing transformation risks, such as Worldline, continue to be under pressure. The current market sentiment is heavily risk-averse, with funds concentrating on targets that have high certainty and growth acceleration potential.

SAP: A Key Test of Confidence

Morgan Stanley's data shows that the market is currently focused on whether SAP can fulfill its high growth promise for cloud business.

According to the company's forward guidance, SAP expects cloud revenue to reach the lower limit of €21.6 billion to €21.9 billion at constant exchange rates, representing a year-on-year growth of 26% to 28%; total cloud and software revenue is expected to be between €33.1 billion and €33.6 billion. In terms of profitability, non-International Financial Reporting Standards (Non-IFRS) earnings before interest and taxes (EBIT) are expected to approach the upper limit of €10.3 billion to €10.6 billion, with a year-on-year growth of 26% to 30%.

Morgan Stanley analyst Adam Wood maintains a positive stance on SAP. The firm believes that SAP's medium-term goals—namely, exceeding €21.5 billion in cloud revenue, over €37.5 billion in total revenue by 2025, and achieving a predictable revenue ratio of around 86%—remain the core support for its valuation logic. If SAP can confirm the progress of these goals this week and maintain strong momentum in its 2026 guidance, it may inject much-needed confidence into the entire software sector

Payment Sector: Accelerated Growth and Transformation Pains Coexist

Beyond software services, the earnings forecasts in the payment sector also reveal the market's stock-picking logic: accelerated growth is key to revaluation. Morgan Stanley pointed out that Wise's third-quarter earnings for fiscal year 2026, announced this week, exceeded expectations, proving that accelerated revenue growth can drive positive revaluation of European fintech stocks in the short term.

Based on this logic, Morgan Stanley is optimistic about Adyen in the upcoming earnings reports. The firm believes Adyen is a structural winner with accelerated growth potential, maintaining an "overweight" rating with a target price of €1,925.

In contrast, Worldline, which is undergoing a transformation, has been rated "underweight." Although its extraordinary general meeting approved a €500 million capital increase plan, and the disposal of four non-core assets is expected to be completed in the first quarter to improve the balance sheet, Morgan Stanley believes that the execution risk of the transformation plan limits the visibility of earnings, and the recovery of free cash flow may take longer than the target timeline.

Diverging Prospects for Other Tech Stocks

In the IT services and hardware sectors, Morgan Stanley has also observed significant performance divergence. Computacenter showed clear signs of acceleration in its fourth-quarter trading update, with strong performance in the second half driving gross profit significantly above expectations, and adjusted pre-tax profit (PBT) exceeding market expectations by 6%, with an expectation of "not less than" £270 million for fiscal year 2025.

For Oracle, Morgan Stanley takes a relatively cautious stance. Although GPU as a Service (GPUaaS) represents a significant revenue opportunity, the joint in-depth analysis by the firm's equity, credit, and valuation teams indicates that the construction of related infrastructure will lead to earnings per share below targets and higher financing needs. Currently, stock valuations seem to reflect this risk, while credit valuations still appear too high.

Morgan Stanley believes that in this volatile earnings season, investors should prioritize those that can demonstrate resilient growth and are not negatively impacted by structural technological changes (such as GenAI) as "structural winners."