Wall Street remains optimistic about software companies despite recent market downturns. The rise of artificial intelligence (AI) has sparked discussions on its potential to disrupt various job sectors. New tools like Anthropic’s Claude Cowork hint at a future where AI acts more like a collaborator than just a chatbot. However, the software sector has faced challenges, with the iShares Expanded Tech-Software Sector ETF dropping over 22% since December. This decline puts many software stocks in a bear market, but analysts believe some might still be undervalued and hold promise.
Recent scores of Wall Street experts are advocating for specific software stocks with substantial upside potential. Here’s a look at three of those promising companies:
Datadog: 61% Upside Potential
Datadog, known for its robust cloud monitoring and security services, has seen its stock price plummet from nearly $200 to around $120. This company helps businesses monitor their infrastructure, detect security threats, and analyze user interactions, which are critical for enhancing cloud performance. While competition from AI may loom, there’s a strong possibility that Datadog could integrate AI into their offerings to improve efficiency and open new business avenues.
Analyst Gil Luria from D.A. Davidson emphasizes that the fundamentals of the software business model remain constant. Datadog is projected to grow its revenue by about 20% by 2026. Notably, the company secured a significant contract with a large AI client, likely OpenAI, which suggests its relevance in the AI landscape. Out of 33 analysts monitoring Datadog, 30 rate it a buy, indicating a strong consensus about its future potential.
Snowflake: 63% Upside Potential
Snowflake, a data storage and analytics powerhouse, has wrestled with investor skepticism since it went public in late 2020. The company enables businesses to efficiently store and analyze vast amounts of data across multiple cloud platforms. CEO Sridhar Ramaswamy emphasizes that AI should be viewed as a tool rather than a complete replacement. Snowflake’s partnerships with leading AI firms, including Palantir Technologies and OpenAI, underscore its strategic importance in the AI realm.
Despite facing challenges with profitability and market expectations, analysts are still bullish. The stock has a 63% upside potential, supported by a buy rating from 30 out of 33 analysts surveyed. This suggests that investors see a pathway for Snowflake to navigate current market concerns successfully.
Microsoft: 47% Upside Potential
Even though Microsoft is primarily seen as a tech giant, it also stands firmly in the software sector. Its recent drop of over 23% raises eyebrows, especially given the expectations surrounding AI. Microsoft’s robust suite of tools, like Microsoft 365, plays a crucial role in the ongoing tech transformation. However, recent earnings reports revealed slower-than-expected growth in their Azure cloud business, triggering a sell-off.
Despite these challenges, analysts predict that Microsoft is still well-positioned to capitalize on AI advancements. UBS points out that Microsoft 365’s revenue growth is steady, thanks in part to its AI tool, Copilot, which has attracted millions of users. Of the analysts assessing Microsoft, 34 out of 35 maintain a buy rating, showcasing strong confidence in its ability to rebound.
As AI continues to evolve, investing in software companies could be a strategic play. Understanding these businesses and their potential for growth will be crucial as the market adjusts to rapid changes.
