On the March 16 episode of The Morning Filter, David Sekera and Susan Dziubinski discuss Morningstar’s recent changes to company moat ratings caused by AI and which stocks still look attractive today. Here is an excerpt from the show.
How AI Is Threatening Companies’ Economic Moats
Susan Dziubinski: Now, Dave, let’s talk about some of your prior picks that have seen their economic moats downgraded from wide to narrow due to the threat of AI. And those picks are Adobe ADBE, Salesforce CRM, and ServiceNow NOW. So talk about them.
David Sekera: Yeah. So all three of these stocks are still rated 4 stars. Just going down the list here, Adobe was the most negatively impacted of the three. We lowered our moat rating to narrow from wide. That led to a pretty substantial decrease in our fair value estimate by 32%. That fair value is now at $380 a share, but the stock is trading at a 28% discount to even that lowered fair value. ServiceNow, we lowered our moat there to narrow from wide. That led to an 18% decrease in our fair value. Our fair value estimate per share right now is $165. It’s currently trading at a 30% discount to that fair value. And then, of the three, Salesforce was the one that was least impacted, so we lowered the moat there to narrow from wide, but we only decreased our fair value by 7% to $280 a share. That one’s trading at a 31% discount.
Of the three, I think this is the one that’s probably most attractive in our mind. I think it’s the one that Dan Romanoff, he’s the equity analyst that covers these companies, still has the most confidence in over the long term. Generally, and I think we’ve spoken about this a couple times, the investment thesis on software overall is that they will evolve their business models over time. They will incorporate more AI usage, be able to provide more economic value to their clients, and will end up changing to more of a consumption-based model as opposed to a seat-based model. Over the next few years, we think that companies will end up adopting more agentic solutions within that third-party software, and companies and their clients aren’t really going to try and vibe-code their own software systems. We still see a place for third-party software over the long term, even in an environment of increasing artificial intelligence usage.
What AI Means for Software Companies’ Moats
We’re no longer certain that software firms will outperform over the next decade, but positive outcomes remain possible for names like Salesforce.
Why Microsoft’s Moat Remains Wide
Dziubinski: Now, speaking of Dan Romanoff, he’s Morningstar software analyst, and we’re providing a link in the show notes to an article that Dan wrote talking a bit about these moat changes.
Now, there is a recent software stock pick of yours whose moat didn’t get downgraded, and that was Microsoft MSFT. So talk a little bit about why Microsoft’s wide economic moat remains intact in the face of AI, and then tell us whether Microsoft remains a pick of yours today.
Sekera: Sure. The wide economic moat on Microsoft is really based on four of the five economic moat sources. We think their economic moat is bolstered by switching costs, network effects, cost advantages and, to some benefit or some degree as well, intangible assets. I mean, just a couple of quick examples here as far as switching costs go, I mean, they have very deep product integration among their different clients and customers. They’re very broad portfolio. We think that overall that strengthens the amount of customer stickiness that they have over time, i.e., meaning that it’s more expensive for companies to try and switch over to other different types of products than their own, as opposed to just continuing to keep using Microsoft products. Looking at some of their individual products like Azure and Office, we think those ecosystems drive very powerful network effect. The network effect, meaning that the more people that actually use a system, the more valuable it gets to all of the people using that product.
And then to some degree, I think the wide moat and reiterating that wide remote rating is also just a result of the very diversified product portfolio they have of different types of businesses. Yes, some of them may be negatively impacted over time from AI like Office products, but I think that would be more than offset by positive impacts to things like Azure and Copilot and some of their other AI businesses. Overall, the stock’s trading at a 33% discount to fair value, puts it in 5-star territory. And overall, I think it’s still Dan’s top pick.
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