Against a backdrop of sharp sell-offs in European software stocks and widespread price weakness across the sector, the market is eagerly searching for an "anchor" to stabilize sentiment. Morgan Stanley noted that as the Q4 2025 earnings season begins, whether SAP SE, Europe's largest software company, can deliver satisfactory results on Thursday will be the key focus for the market this week.

According to Morgan Stanley analyst Adam Wood's team in a January 25th report, despite ongoing market concerns surrounding generative AI (GenAI) leading to fragile investor sentiment, core software companies are still expected to report robust fourth-quarter data. The bank anticipates that companies will issue fiscal 2026 guidance in line with expectations, and management will convey confident signals, but whether this will be sufficient to build a bottom for stock prices in the short term remains to be seen.

Previously, as early as November 18th, Barclays analysis indicated that the earnings season would be unlikely to serve as a positive inflection point for market sentiment. Currently, investors are burdened by two major concerns: first, the "AI overhang," meaning extreme market worry that AI's disruptive power will dismantle the moats of existing application software companies; second, the unsustainable high levels of capital expenditure by hyperscale cloud providers to support AI development.

Beyond the core software sector, divergence is also intensifying in the payments and fintech space. Morgan Stanley pointed out that despite a challenging macro environment, companies with structural growth advantages, such as Wise, have shown signs of acceleration, while companies facing transformation risks, like Worldline, continue to face pressure. The current market sentiment is strongly risk-averse, with capital flowing towards assets possessing high certainty and potential for accelerated growth.

SAP: A Crucial Test of Confidence Data from Morgan Stanley shows the market is currently focused on whether SAP can deliver on its promise of high growth in its cloud business.

According to the company's forward guidance, SAP expects cloud revenue, at constant currency, to reach the lower end of the range of €21.6 billion to €21.9 billion, representing year-on-year growth of 26% to 28%. Total cloud and software revenue is projected to be between €33.1 billion and €33.6 billion. Regarding profitability, non-IFRS operating profit (EBIT) is expected to be near the upper end of the €10.3 billion to €10.6 billion range, indicating growth of 26% to 30%.

Morgan Stanley analyst Adam Wood maintains a positive stance on SAP. The bank believes SAP's medium-term targets—specifically, achieving cloud revenue exceeding €21.5 billion, total revenue surpassing €37.5 billion by 2025, and raising the share of predictable revenue to around 86%—remain the core supporting its valuation thesis. If SAP can confirm progress towards these goals this week and maintain strong momentum in its 2026 guidance, it could inject much-needed confidence into the entire software sector.

Payments Sector: Accelerated Growth Amid Transformation Pains Beyond software services, earnings previews from the payments sector reveal the market's stock-picking logic: acceleration in growth is the key to re-rating. Morgan Stanley noted that Wise's Q3 FY2026 results, announced this week and exceeding expectations, demonstrate that accelerating revenue growth can drive a positive re-rating for European fintech stocks in the short term.

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

In contrast, Worldline, which is in a transition phase, is 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, aimed at improving the balance sheet, Morgan Stanley believes execution risks associated with the transformation plan limit earnings visibility, and the recovery of free cash flow might take longer than targeted.

Diverging Prospects for Other Tech Stocks In the IT services and hardware sectors, Morgan Stanley also observed significant performance divergence. Computacenter's Q4 trading update showed clear signs of acceleration, with a strong second-half performance driving gross profit significantly above expectations; adjusted profit before tax (PBT) was 6% ahead of market forecasts, with FY2025 expected to be "not less than" £270 million.

Regarding Oracle, Morgan Stanley holds a relatively cautious stance. Although GPU-as-a-Service (GPUaaS) represents a substantial revenue opportunity, a joint deep-dive analysis by the bank's equity, credit, and valuation teams suggests that building the related infrastructure will lead to earnings per share falling below targets and higher financing needs. Current equity valuations appear to reflect this risk, while credit valuations still seem too high.

Morgan Stanley believes that in this volatile earnings season, investors should prioritize focusing on "structural winners" that can demonstrate resilient growth and have not been negatively impacted by structural technological changes, such as GenAI.