MORGAN STANLEY: Only 3 software companies will sustain 'hyper growth' — and their valuations could soar (NOW, YEXT, MDB)

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Software saw a lot of "hyper growth" last year, but that trend is likely to slow through 2019, according to Morgan Stanley.
Of the 48 companies the firm follows, only three are set to sustain 30% growth through 2019.
Those three — ServiceNow, MongoDB, and Yext — could see their valuations soar on such growth.

Software companies were high performers last year, with at least 18 growing more than 30% over the year. But Morgan Stanley thinks that trend is on its way out.

In a report published Monday, Morgan Stanley projected that just three of the top software companies — ServiceNow, MongoDB, and Yext — would sustain 30% growth over the next two years.

And those three companies could see their valuation surge on such growth.

"Hyper growth stories in software are becoming more scarce, which could force premium valuations for companies able to sustain these high rates of topline growth," Keith Weiss, an analyst, said in the report.

Beyond those three companies, Morgan Stanley identified five others that could also hit 30% growth if they outperform the firm's expectations: Workday, Splunk, Zendesk, Atlassian, and Proofpoint.

Nonetheless, Morgan Stanley's top picks in software aren't young, high-growth companies. Weiss and his team are expecting big things from old standbys at Microsoft, Salesforce, and GoDaddy.

The firm thinks that Microsoft could hit a market cap of $1 trillion thanks to its growing cloud business and that Salesforce and GoDaddy have the opportunity to significantly grow their margins.

Morgan Stanley Software April 2018