Morgan Stanley bets big on this Midcap AI firm- 3 reasons why it could outgrow IT giants

The brokerage builds its case on sustained revenue growth that is expected to outpace the broader information technology services segment, backed by the company’s deep focus on data and analytics and its push into agentic artificial intelligence platforms. 

Morgan Stanley’s big IT bet

Morgan Stanley expects revenue to grow at a compounded annual rate of 18% between FY26-FY28  placing it among the faster growing mid-sized technology services firms. 

While margins remain lower than peers at present, Morgan Stanley expects operating leverage and improving gross margins to lift earnings before interest and tax margins closer to 15% over the same period.

Morgan Stanley on Fractal Analytics: Positioned to outgrow peers 

Morgan Stanley’s initiation note frames Fractal Analytics as a specialist player in a segment that is expanding faster than traditional technology outsourcing. The firm points to the company’s strong engineering base and its growing presence in enterprise artificial intelligence as key reasons for its constructive stance. It notes that Fractal’s platform-led approach, particularly through its Cogentiq suite, allows it to deliver scalable solutions across industries while building stickier client relationships.

The brokerage also draws attention to the company’s ability to generate higher revenue per employee than many mid-tier peers, which signals stronger pricing power and differentiated offerings. Alongside this, a roster of large global clients and long-standing relationships adds visibility to future business. Morgan Stanley believes that these factors together support sustained growth even as the broader technology spending cycle remains uneven.

“Fractal has a strong engineering background and deep domain expertise, with clear differentiation versus peers,” says Morgan Stanley in its report.

Morgan Stanley on Fractal Analytics: Margins to improve as investments start paying off

While Fractal Analytics currently lags peers on operating margins, Morgan Stanley expects the gap to narrow over the next few years. The brokerage attributes the lower margins to higher spending on research and development, sales, and administrative functions, along with stock-based compensation and acquisition-related costs.

That said, the report argues that the company’s gross margins already indicate the underlying strength of the business. With gross margins hovering around the mid to high 40% range, there is room for operating leverage once incremental costs stabilise. As investments begin to translate into revenue scale, margins are expected to improve steadily.

Morgan Stanley expects this transition to be gradual rather than abrupt, driven by better utilisation, improved business mix, and lower impact from earlier one-off costs. This, in turn, should bring Fractal closer to peer profitability levels by financial year 2028.

“Gross margins reflect a high-quality business, and we expect the EBIT margin gap versus peers to narrow over the coming years,” the brokerage adds.

Morgan Stanley on Fractal Analytics: Premium valuation backed by growth outlook

Morgan Stanley acknowledges that Fractal Analytics trades at a premium compared with several mid-cap technology peers, but it sees justification in the company’s growth trajectory and improving profitability profile. Based on its estimates for financial year 2028, the brokerage expects the stock to sustain higher valuation multiples than peers.

The valuation is built using a sum-of-the-parts approach that assigns different multiples to its core artificial intelligence business and newer initiatives. The brokerage also factors in the value of its stake in associate businesses. Even on a price-to-earnings basis, the stock sits at the upper end of the peer range, but Morgan Stanley believes the expected earnings growth supports this positioning.

The report also notes that Fractal’s exposure to artificial intelligence-driven opportunities could open new revenue streams while strengthening its position within existing accounts.

“We look for superior revenue growth and margin improvement, and expect the stock to sustain premium multiples,” Morgan Stanley says.

Morgan Stanley on Fractal Analytics: Risks from client concentration and investment cycle

Despite the positive stance, Morgan Stanley flags a few areas that could weigh on performance. One of the key concerns is the company’s dependence on a relatively small set of large clients. Any slowdown in spending or project cancellations from these clients could affect revenue momentum.

The brokerage also points to the project-based nature of the business, which may limit long-term visibility compared with companies that rely more on annuity-style contracts. In addition, continued investments in new initiatives such as Fractal Alpha could keep margins under pressure in the near term.

Another area of watch is the evolving nature of artificial intelligence technologies. While this presents opportunities, it could also lead to disruption in existing revenue streams before new demand fully compensates.

“Client-specific challenges impacting the revenue growth outlook and higher-than-expected losses in newer initiatives remain key risks,” the brokerage adds.

Conclusion

Morgan Stanley’s initiation on Fractal Analytics rests on a simple argument that the company sits in a fast-growing niche and has built capabilities that are difficult to replicate quickly. Strong revenue growth, improving margins, and a differentiated offering in data and artificial intelligence form the core of its investment case. 

The premium valuation may limit near-term upside if execution falters, but the brokerage remains confident about longterm growth potential.

Disclaimer: This article provides factual analysis only and is not, and should not be construed as, an offer, solicitation, or recommendation to buy or sell securities. Investors must conduct their own independent due diligence and seek advice from a SEBI-registered financial advisor.