Teradata's (TDC) Q4 results suggest 2025 set the stage for a return to recurring revenue growth in 2026, with artificial intelligence emerging as a key driver, Morgan Stanley said in a note Wednesday.

The investment firm said the quarter marked the first annual recurring revenue and total revenue growth since 2023.

The company's management guided to modest acceleration in recurring revenue and ARR in 2026. Morgan Stanley expects this to support more than 10% year-over-year free cash flow growth next year.

Morgan Stanley said improving customer retention and data and workload expansion are driving the inflection. Chief information officers are prioritizing AI projects, which should benefit Teradata's hybrid deployment model and large enterprise customer base.

Cloud ARR is projected to grow about 12% year over year in 2026. Declines in non-cloud ARR are expected to moderate to 5% to 6%, compared with roughly 12% average annual declines over the past three years.

Teradata guided to a $320 million midpoint for 2026 free cash flow, implying about 12% year-over-year growth. Cost actions taken in 2024 and 2025 should also support margin and cash flow expansion, according to the note.

Morgan Stanley adjusted its price target on Teradata to $40 from $35 and kept its overweight rating.

Shares of Teradata were up more than 23% in recent trading.

Price: 36.06, Change: +6.83, Percent Change: +23.37