In recent years, the AI trade has emerged as a significant driver of stock market growth, attracting substantial investor interest. However, concerns about a potential bubble and the need for a broader market rally have prompted some investors to explore alternative opportunities. Notably, despite robust earnings reports from prominent technology companies, the AI trade has demonstrated volatility in recent weeks.
Gil Luria, an analyst at DA Davidson, expresses a positive outlook on the AI sector as a whole while highlighting promising opportunities within several lesser-known tech stocks that often reside in the shadows of the industry’s giants, dubbed the Magnificent Seven. These stocks, focused on AI infrastructure and software, are reaping the benefits of investors’ unwavering enthusiasm for AI’s transformative capabilities.
Luria explains his focus on infrastructure software stocks this year, emphasizing their position as the most significant beneficiaries of the increasing adoption of AI. He believes these stocks carry fewer perceived risks compared to application software companies. Among the companies Luria has identified are Snowflake, Datadog, and JFrog, which have showcased impressive year-to-date performances: Snowflake has surged by 62%, Datadog by 11%, and JFrog has skyrocketed by 113%.
Particularly noteworthy is JFrog, a lesser-known Silicon Valley software firm that has outpaced its peers, including those comprising the Magnificent Seven, in terms of growth this year. Luria argues that the demand for software infrastructure will persist, regardless of how the AI market evolves. He points out that as enterprise customers develop AI tools, they will require increased data lakehouse capacity from Snowflake, enhanced applications and infrastructure for monitoring from Datadog, and more binary code management capabilities from JFrog.
While the AI trade is likely here to stay, Luria underscores that Snowflake, Datadog, and JFrog possess a unique competitive advantage, as larger enterprises will always need their services to effectively scale their AI initiatives. He concludes that these three companies benefit from the ongoing growth in AI, reinforcing their value in the stock market landscape.
