Manhattan Associates (MANH) faces downside risk from a weaker macro environment and significant exposure to discretionary services work, Morgan Stanley said in a note emailed Monday.

The firm said Manhattan Associates is well-positioned to secure market share in the sector's $12 billion total addressable market, supported by its best-in-class cloud solutions.

However, near-term macro headwinds have slowed the company's current remaining performance obligation bookings to 7% year over year, presenting downside risk to 2026 cloud revenue estimates.

Further downside risk could come from the company's reliance on discretionary professional services, which make up about 50% of total revenue. Morgan Stanley's recent CIO survey indicated muted growth and increased discounting in IT services spending, suggesting the potential for softer demand.

"While management sounds confident in a recovery in the services business, it is structurally a more discretionary part of IT budgets," Morgan Stanley said.

The firm also noted that Manhattan Associates' shares trade at a premium valuation of around 39 times free cash flow, which may already reflect optimistic expectations and underappreciate the risk of downward estimate revisions.

Morgan Stanley initiated coverage on Manhattan Associates with an underweight rating and a $190 price target.

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