Many Wall Street analysts remain optimistic about the future of software businesses, even in the face of increased market volatility sparked by advancements in artificial intelligence (AI). The rapid evolution of AI tools, such as OpenAI’s ChatGPT and Anthropic’s Claude Cowork, has ignited widespread speculation about the potential impacts on the job market and specific industries. Claude’s ability to autonomously perform tasks typically handled by various software applications has led to a shift in perception, viewing AI more as a collaborative partner than merely a chatbot.
Despite the current downturn—evidenced by the iShares Expanded Tech-Software Sector ETF, which has plummeted over 22% since December 10—analysts believe this sell-off may be overblown. They are identifying opportunities in software stocks that could offer substantial gains.
Datadog has been highlighted for its strong potential, with an average price target suggesting a remarkable upside of 61%. The cloud monitoring and security firm has experienced significant losses, dropping from nearly $200 per share in early November to approximately $120. Datadog’s services—including infrastructure monitoring, threat detection, and user interaction tracking—position it well in an increasingly automated landscape, where AI can enhance operations rather than wholly replace them. D.A. Davidson analyst Gil Luria asserts that the fundamental software business model remains intact, projecting revenue growth of 20% by 2026. Notably, Datadog has landed a significant annual deal with a major AI client, believed to be OpenAI, further reinforcing its relevance in the evolving market.
Snowflake emerges as another key player, with an impressive potential upside of 63%. Since its public debut in late 2020, the data-intensive company has garnered attention for its advanced capabilities in data storage and analysis across various cloud platforms. Despite concerns about its profitability and recent guidance disappointments, CEO Sridhar Ramaswamy emphasizes that AI should be seen as a complementary tool, enhancing rather than replacing business capabilities. Recent partnerships with prominent AI firms, including a $200 million deal with OpenAI, signal a collaborative direction that aligns with AI advancements. Analysts are notably bullish on Snowflake, with 30 out of 33 issuing buy ratings.
Microsoft, while more than just a software company due to its significant AI investments, has seen its stock decline over 23% in recent months. The company’s broad portfolio includes essential office products like Excel and Word, which are housed under the Microsoft 365 platform. Investors reacted negatively to lower-than-expected growth from Microsoft’s Azure cloud business, critical for its AI revenue. UBS analysts highlighted concerns over stagnating revenue growth in Microsoft 365, even with the promising integration of AI assistant Copilot, which has attracted 15 million paid users. Despite these challenges, Microsoft remains one of the top ways for investors to gain exposure to AI, with 34 of 35 analysts recommending buy ratings and an implied upside of nearly 47%.
As the landscape for software and AI continues to evolve, Wall Street analysts maintain that there are still promising investment opportunities within the sector, even amid fears of AI displacing traditional software roles.
