2Q26 SaaS demand resilience remains, but catalysts for sector re-rating are insufficient

Overview

This report is Morgan Stanley's preview of the 2Q26 earnings season for North American SaaS application software. The core judgment is that demand has not deteriorated meaningfully, with channel checks and CIO surveys still showing stable fundamentals, but AI monetization remains in the early stages and macro uncertainty makes management more likely to provide cautious guidance; therefore, 2Q earnings themselves are insufficient to drive a broad re-rating of the application SaaS sector. The report emphasizes stock selection at the single-name level, focusing on companies with valuation protection, lower expectations, or upside optionality from AI/new products.

Core views

The report's core views include: first, SaaS demand is resilient, but the market needs larger earnings beats and guidance raises to drive a systematic re-rating from depressed valuations; second, AI usage and product innovation are increasing, but most companies have yet to prove that AI can deliver sustainable, disclosable, and predictable incremental revenue; third, 2H26 is more likely than 2Q26 to become a window for meaningful upward revisions; fourth, tactically it prefers GDDY and KVYO, with the former supported by free cash flow and booking recovery, and the latter by lower expectations, new product optionality, and the advantage of usage-based pricing.

Analysis framework

The report combines channel checks, CIO surveys, company-level 2Q earnings expectations, buy-side expectations, Street consensus, management guidance, valuation multiples, web traffic, hiring trends, and historical beat cadence to conduct a company-by-company earnings preview and risk-reward assessment for SaaS companies.

Methodology notes

• Fundamental validationChannel checks and CIO surveys

  Demand resilience validation

  Use channel feedback and CIO surveys to assess enterprise software budgets, deal cycles, and project delays, in order to evaluate 2Q revenue and visibility into second-half growth.

• Earnings previewBeat vs. Consensus / Beat vs. Guidance

  Beat and guidance-raise framework

  Compare Morgan Stanley forecasts, market consensus, and company guidance to assess potential upside in revenue, margins, and full-year guidance at earnings release.

• Valuation analysisEV/S, EV/FCF, EV/Gross Profit and growth-adjusted multiples

  Valuation margin of safety and re-rating potential

  Use revenue multiples, free cash flow multiples, gross profit multiples, and growth-adjusted valuation to judge whether upside expectations are already priced in or whether undervaluation remains.

• Alternative dataWeb traffic and hiring trends

  Operating momentum tracking

  Use indicators such as website visit trends, login page traffic, and job postings to help assess demand, business activity, and expansion intentions for companies such as GoDaddy, Wix, and LegalZoom.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• GoDaddy Inc (GDDY)

  tactical preferred name

  Strengths

  Strong free cash flow support, AI-driven improvements in customer service and R&D efficiency, expected recovery in 2Q bookings growth, and improving web trends.

  Weaknesses

  Revenue contribution from AI-native products and ANS remains unclear, and management has yet to prove that growth can be meaningfully lifted.

  Comparison

  About 8x FCF is below Smid Software at about 13x FCF, but growth-adjusted valuation of about 0.9x is above peers at about 0.7x.

  Risks

  Unclear path for growth catalysts, AI product customer metrics not yet reaching pricing conditions, and weaker-than-expected 2Q recovery.

• Klaviyo Inc (KVYO)

  tactical preferred name

  Strengths

  Business and pricing model are better aligned with usage, seat-pricing risk is lower, new products and platform expansion provide upside optionality, and current FY26 outlook assumes low contribution from new products.

  Weaknesses

  2Q is more about growth stabilization than clear acceleration, and absorbing carrier costs may pressure gross margin.

  Comparison

  Valuation below 4x EV/Gross Profit is seen by the report as not fully reflecting sustained 20%+ growth and margin expansion.

  Risks

  New product adoption below expectations, slowing international and enterprise expansion, and ongoing gross margin pressure.

• HubSpot (HUBS)

  fundamentals still positive but catalyst more likely in 2H

  Strengths

  Core business is stable, customer budgets are healthy, and multi-hub adoption plus the trend of replacing traditional vendors continues.

  Weaknesses

  2Q channel checks are slightly mixed, and AI revenue contribution remains in the low single digits.

  Comparison

  About 2x Sales and about 0.13x growth-adjusted multiple are below Smid Software at about 4x and about 0.3x.

  Risks

  Longer enterprise approval cycles, delayed projects failing to convert in 2H, and AI adoption not accelerating.

• Wix.com Ltd (WIX)

  name under cautious observation

  Strengths

  Base44 and Wix Harmony have shown positive early signals, and valuation at about 3x FCF is low.

  Weaknesses

  The health of the core business and slowing Partners growth are raising structural concerns, while investment intensity remains high.

  Comparison

  The report has downgraded it to Equal-weight and believes multiple quarters of improved execution are needed to rebuild confidence.

  Risks

  AI changing the competitive landscape, continued deterioration in core traffic and bookings growth, and re-rating taking longer.

Key data

• Industry demandChannel checks and CIO surveys show stable demandBut management outlook is still expected to remain cautious, limiting broad upward revisions for the sector.
• AI monetizationStill in the early stagesThe report believes growing AI usage has not yet broadly translated into sustainable revenue contributions.
• GDDY 2Q bookings growthabout 6% YoYAfter being dragged down by 1Q promotional activity, 2Q bookings growth is expected to recover.
• GDDY 2Q revenue growthabout 7% YoYAbout 50 basis points above Street expectations, in line with the recent beat cadence excluding the Aftermarket business.
• GDDY valuationabout 8x FCF; about 0.9x growth-adjusted multipleVersus Smid Software at about 13x FCF and about 0.7x growth-adjusted multiple, the report believes valuation is broadly fair but tactically favorable for 2Q setup.
• KVYO buy-side revenue expectationabout 27% YoYAbove Street/company guidance of about 23%, but more reflective of growth stabilization rather than significant acceleration.
• KVYO FY26 revenue guidance expectationabout 24%Above the prior level of about 23%.
• KVYO margin expectationabout 15%, expanding about 100 basis points year over yearThe report believes valuation below 4x EV/Gross Profit is low given 20%+ growth and margin expansion.
• SaaS application software valuationEV/S multiple at about a 45% discount to the broader software sectorSector valuations are near lows, but broad upward revision catalysts are lacking.
• HubSpot 2Q expectation18% CC growth, 3Q guidance 16%-17% CCThe report maintains an Overweight view on fundamentals, but believes meaningful revisions are more likely in 2H.

Impact & implications

For portfolios, the report recommends against simply betting on a broad re-rating of the SaaS sector, and instead selecting companies with better expectation setups, stronger valuation support, and clearer AI or new-product optionality. GDDY is suitable as a defensive free-cash-flow and valuation choice, while KVYO is suitable as a growth choice with lower expectations and upside optionality from platform expansion; at the same time, for companies such as WIX and LZ, investors should watch whether core business pressure offsets potential improvements from AI or new products.

Risks

• AI monetization progresses more slowly than the market expects, leaving valuation re-rating without fundamental support.
• Macro uncertainty and longer enterprise approval cycles may lead management to issue conservative guidance, suppressing the scale of full-year upward revisions.
• Even if 2Q earnings are stable, they may still be insufficient to prove that SaaS growth is reaccelerating.
• Some companies' new products are still in beta or early commercialization stages, making revenue contribution and margin impact opaque.
• Low valuations do not necessarily equal a margin of safety; if the core business continues to slow, low multiples may persist.

What to watch

• Whether GDDY's 2Q bookings growth approaches about 6% YoY, and whether revenue growth reaches about 7% YoY.
• Whether GDDY's Airo AI builder, W+M upgraded experience, and ANS begin to make a clearer contribution to revenue or growth expectations.
• Whether KVYO delivers revenue growth above Street/guidance and raises FY26 growth guidance to about 24%.
• Whether KVYO's new products, Enterprise, International, and Multi-product strategy continue to support growth resilience.
• Whether AI credits, agents, and AI product usage convert from higher adoption rates into sustainable revenue contribution.
• Whether the 2H26 earnings season brings more substantial revenue upward revisions, margin improvement, and stronger management confidence than 2Q.