Morgan Stanley cuts ASX tech price targets by 20%, warns valuations are still living in the past

Morgan Stanley has slashed price targets across its entire ASX software and tech coverage by an average of 20%, warning that most local valuations still reflect a world that existed before the latest generation of AI coding models arrived.

The analysts have a clear message after returning from the Morgan Stanley TMT Conference in San Francisco last month: The rules have changed, and the sector needs to reprice accordingly.

The cuts land with the average price target now sitting roughly 20% below consensus expectations. This represents a deliberate and material gap, reflecting the analysts' view that the broader market has not yet fully absorbed the implications of AI coding tools such as ChatGPT, Codex, Gemini, and Grok on long-term software economics.

What's driving the cuts

The core of Morgan Stanley's thesis is not that these companies are broken, but rather, the structural assumptions underpinning their valuations are too generous. The investment bank has cut longer-term revenue growth forecasts by 2-3 percentage points on average and a larger 4-5 percentage point cut for terminal EBITDA margins.

To put that into tangible terms:

• Pro Medicus: Terminal EBITDA margin lowered from 80.5% to 74.6%

• WiseTech : From 53% to 49%

• REA Group: Approximately 4 ppt reduction across the terminal period

• CAR Group: Approximately 2.5 ppt reduction

The rationale is pretty straightforward. Companies that used to benefit from the sheer difficulty of building complex software (years of development cycles, proprietary code bases, high engineering costs), now face a world where a well-resourced competitor can replicate core features in a fraction of the time. That puts pressure on pricing power for anyone whose moat was primarily about product complexity. It also means every market leader, from REA in real estate to WiseTech in freight logistics software, has to prove its dominance again rather than simply assume it continues.

At the same time, companies need to spend more to stay competitive, meaning more spend on cloud infrastructure, data integration, AI model embedding, and talent. That spending hits margins before the revenue benefits show up.

Near-term EPS cuts across the coverage are relatively modest by comparison, but the investment bank is explicit that consensus earnings risk skews to the downside. AI spending is being expensed ahead of revenue realisation, sales cycles remain elongated, and only TechnologyOne has, to date, upgraded its revenue and earnings outlook in a way directly attributable to AI.

The average cost of capital (WACC) across Morgan Stanley's coverage also moved from 9% to 10.1%, reflecting higher execution and competitive risk for these long-duration assets. For software and internet stocks, which derive a disproportionate share of their value from earnings well into the future, even modest increases in discount rates have an outsized impact on price targets.

The sell-off has been indiscriminate

While Morgan Stanley agrees with the direction of the recent de-rating, it disagrees with the magnitude of some declines.

Stocks under its coverage have fallen an average of ~50% from their 2025 highs and are down ~27% year-to-date in 2026. Their view is that this indiscriminate selling has failed to distinguish between businesses with genuinely durable competitive positions and those that are more vulnerable.

The implied upside in the bank's revised price targets reflects this view. Even after cutting targets materially, the numbers still imply significant upside from current prices across many names:

Source: Morgan Stanley Research

What to own and why

The analysts' highest-conviction names are REA Group and CAR Group among the internet classifieds, and WiseTech Global, Xero, and TechnologyOne in pure software.

Morgan Stanley's framework for separating the durable from the vulnerable has very little to do with how good the product is today. Instead, they focus on answering: Does the competitive advantage survive if writing software becomes cheap and fast?

The most defensible businesses tend to be ones where the switching cost has nothing to do with the software itself. Wisetech has spent years building direct connections with ports, airlines, and customs offices around the world. These relationships take considerable time and effort to establish regardless of how quickly a competitor can write code. Xero is embedded in the workflows of accountants and small businesses across Australia and New Zealand in ways that create real organisational inertia. While Pro Medicus has FDA approvals and sits inside 11 of the top 20 US hospitals.

Data is another thing Morgan Stanley is looking for. Companies that sit at the centre of high-frequency transactions accumulate proprietary datasets that get more valuable over time. Wisetech, Pro Medicus, Xero and TechnologyOne are the names called out here.

The analysts also highlight audience and network scale, noting REA Group in residential property, Car Group in auto classifieds, and Seek in employment. These businesses benefit from reinforcing loops that are genuinely hard to disrupt, because the value of the platform is inseparable from the size of the audience already on it.

The key risks

Morgan Stanley is explicit that the "predictable long-term profit margin expansion into perpetuity" story is over for this sector. The key downside risks across the coverage include:

• AI-native entrants replicating core functionality faster and cheaper than incumbents can respond

• Large platforms bundling features natively, cutting out specialist software providers entirely

• Management teams that treat AI as a side project rather than an urgent strategic priority

• Macro uncertainty extending sales cycles, meaning AI investment costs show up before the revenue does

For individual names, Tyro Payments carries the additional headwind of pending RBA reforms on merchant card payment surcharging and interchange fees, expected between October 2026 and April 2027. Airtasker remains structurally challenged, with revenue and GMV growth in the core Australian marketplace already slowing.