A few years ago, the cloud changed the way companies used software. This shift drove users from purchasing licenses to subscribing to services, creating the cloud-based software-as-a-service model. Now we are witnessing another major shift in the software landscape: the rise of generative AI technology. It’s making waves and it remains to be seen how exactly they will crash ashore.
One thing has become clear: the changes in the software industry are creating opportunities for investors. Analyst Steve Koenig describes the situation for Macquarie, describing the current moment as a great buying opportunity.
“The acceleration of cloud revenue trends at large hyperscalers bodes well for software as customers have largely optimized their spend in the cloud and are investing in digital transformation, cloud migration and AI,” Koenig said . “AI investments are flowing up the stack, from GPUs to infrastructure-as-a-service (IaaS) to platform-as-a-service (PaaS) and applications.”
Against this backdrop, Koenig has picked two AI-driven software stocks as winners for the year ahead. We opened the TipRanks database to see what the rest of the Street thinks about these picks and whether they share the same bullish outlook. Let’s dive in.
GitLab(GTLB)
The first stock we look at, GitLab, is known for its work in software development, security, and operations. Specifically, the company offers its users and customers an AI-powered DevSecOps platform, based on open source code and utilizing the freemium sales model. That is, anyone can make additions to the platform’s base code, whether it’s John Q. Public offering an improvement for the company, or Joe User making a tweak to his own company’s copy, and GitLab makes it basic platform product available to everyone. free. Paying users can purchase subscriptions to gain access to upgrades and specialized tools.
At its core, the GitLab software platform allows users to put all their DevSecOps work and tools into a single, unified platform for a smoother and more efficient workflow. The company uses AI technology to provide in-software assistance to users, and makes AI available to these users throughout the entire cycle of the software development process. The company’s AI can provide real-time assistance, troubleshoot problems, and even point out vulnerabilities in the product code the user is building. GitLab’s AI, called Duo, is part of the company’s subscription package.
All this has made GitLab extremely popular. The company has over 40 million registered users and generated over $175 million in subscription revenue in its last reported quarter, the fiscal 3Q25 (October quarter). Total revenue for the fiscal quarter was $196 million, a gain of 31% year over year, and exceeded forecasts by $7.75 million. The company’s non-GAAP earnings per share came in at 23 cents per share, compared to 9 cents in the same period last year and 7 cents per share better than expected. Importantly, GitLab converted its free cash flow from a net negative in Q3-24 to a net positive in the current report of $9.7 million.
Macquarie’s Koenig is bullish on this, saying of GitLab: “We are bullish on GTLB as an investment opportunity. The company’s large market capabilities in software development, security and IT operations provide ample room for growth as GTLB expands its platform capabilities throughout the software development lifecycle. Our customer reviews indicate strong differentiation driving demand for the GitLab platform, as its ability to support diverse personas, collaborate in the cloud, connect to third-party tools, and support AI workloads allows customers aims to accelerate and automate their software delivery, improving productivity around the world. DevSecOps teams.”
Looking ahead, Koenig outlines why he believes this opportunity is solid, adding: “GTLB is our top pick based on our perception of a significant valuation discount and catalysts that could include FY26 revenue outperformance, margin expansion, improving Rule of 40 scores and strong FCF generation.”
Taken together, these comments support Koenig’s Outperform (i.e. Buy) rating on the stock, while his $90 price target implies a one-year upside of more than 53.5%. (To view Koenig’s track record, click here)
GitLab has picked up a lot of interest from the street. The 23 recent analyst ratings were split 20-3 in favor of Buy over Hold, supporting the Strong Buy consensus rating. The shares are trading for $59.07 and their average price target of $80.43 suggests the stock will see a 36% gain over a one-year period. (To see GTLB stock forecast)
Datadog, Inc.(DOG)
Next up is Datadog, a leader in real-time data analytics. The company offers cloud monitoring as a service, giving customers subscription access to a platform optimized for monitoring system infrastructure, app performance, access logs, real users and more.
Datadog’s service uses AI to automate these tasks, speeding up the process and improving the platform’s built-in scalability. Users have leveraged Datadog’s products to smooth digital transformations and cloud migrations, team collaboration, accelerated marketing schedules, and troubleshooting. In short, Datadog makes it possible for users to get the most out of their site monitoring, tracking and security activities, especially in the cloud.
Features Datadog offers include tools designed for SaaS and cloud users and providers, AI-powered automation, intuitive monitoring tools, bug tracking, and unified databases and server components. Using the company’s platforms and products, Datadog’s customers gain full visibility into the real-world operations of their applications, in real time.
Datadog also offers users access to Bits AI, the company’s interactive AI platform that uses natural language to receive questions and provide answers. This is a prime example of one of the most profound changes genAI technology is bringing to the digital world. By making natural language processors more effective and intelligent, AI allows system users to bypass the need for code and talk to software systems in a more intuitive way. With Bits AI, Datadog brings this possibility to data analysis and cloud monitoring.
The success of Datadog’s products and business model is evident in the company’s latest set of earnings results. For Q3 24, Datadog reported revenue of $690 million, up 26% from the prior year and more than $25 million ahead of forecast. The company’s earnings figure of 46 cents per share according to non-GAAP metrics was 6 cents per share higher than estimates.
Datadog also exceeded expectations on its prospects. For the fourth quarter, the company expected revenue between $709 million and $713 million, compared to the consensus of $710.44 million, and non-GAAP earnings per share between $0.42 and $0.44 versus The Street’s estimate of $0 ,40.
Analyst Koenig summarizes Datadog’s positives, writing: “DDOG has been gaining market share in a fast-growing observability market, which we attribute to a well-designed user experience, unified platform, multi-product adoption and expansion of capabilities. The company’s moves to embrace AI provide exposure to major language inference (LLM) (with LLM Observability) and differentiate its workflow and analytics capabilities (with Bits AI and Toto). We are positive about the prospects for continued DDOG revenue growth (above the 20% level), especially as cloud spending has resumed growth. Finally, the company has strong fundamentals, with a ‘Rule of 40’ score above 50, supported by a differentiated competitive position and strong execution. capabilities.”
Koenig then puts his own results in a decidedly bullish tone: “We recommend investors buy DDOG based on near-term catalysts that could include significant fiscal 25E revenue growth as the year progresses, continued margin improvements and a consistent Rule of 40 -score of 50. + points.”
His Outperform (i.e. Buy) recommendation comes with a $200 price target that indicates 28% upside potential over the next twelve months.
This stock’s Strong Buy consensus rating is based on 30 recent reviews, including 28 for Buy versus just 2 for Hold. That said, the average price target of $158.43 suggests the stock will remain within a range for now. It will be interesting to see if analysts will raise their price targets or lower their ratings soon. (To see DDOG stock forecast)
To find good ideas for stocks trading at attractive valuations, visit TipRanks’Best Stocks to Buy, a tool that unites all of TipRanks’ stock insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is for informational purposes only. It is very important to do your own analysis before making an investment.
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