A few years ago, the cloud transformed how companies use software. The shift moved users from purchasing licenses to subscribing to services, giving rise to the cloud-based software-as-a-service model. Now, we’re witnessing another major shift in the software landscape — the rise of generative AI technology. It’s making waves, and it remains to be seen exactly how they’ll crash ashore.
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One thing has become clear – the changes in the software industry are creating opportunities for investors. Covering the situation for Macquarie, analyst Steve Koenig describes the current moment as a great buying point.
“Accelerating cloud revenue trends at major hyperscalers bode well for software, as customers have largely worked their way through cloud spending optimization efforts and are investing in digital transformation, cloud migration, and AI,” Koenig opined. “AI Investments are flowing upwards in the stack, from GPUs to infrastructure-as-a-service (IaaS) to platform-as-a-service (PaaS) and applications.”
Against this backdrop, Koenig has picked out two AI-driven software stocks as winners for the coming year. We’ve opened up 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’re looking 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 using the freemium sales model. That is, anyone can insert additions to the platform’s basic code, whether it is John Q. Public offering an improvement for the company, or Joe User putting in a tweak on his own company’s copy, and GitLab makes the basic platform product available to all free of charge. Paying users can buy subscriptions to gain access to upgrades and specialized tools.
At its heart, the GitLab software platform allows users to put all of their DevSecOps work and tools in a single, unified platform, for a smoother and more efficient workflow. The company uses AI tech to provide in-software assistance for users, and makes AI available to those users across the full cycle of the software development process. The company’s AI can provide real-time assistance, resolve troubleshooting matters, and even indicate vulnerabilities in the product code that the user is building. GitLab’s AI, dubbed Duo, is part of the company’s subscription package.
All of this has made GitLab enormously popular. The company has over 40 million registered users, and in its last reported quarter, fiscal 3Q25 (October quarter), generated over $175 million in subscription revenue. The total revenue for the fiscal quarter came to $196 million, for a 31% year-over-year gain, and beating the forecast by $7.75 million. The company’s bottom-line, non-GAAP EPS came to 23 cents per share, up from 9 cents in the year-ago period and 7 cents per share better than had been expected. Importantly, GitLab turned its free cash flow from a net negative in fiscal 3Q24 to a net positive in the current report of $9.7 million.
Macquarie’s Koenig is upbeat here, saying of GitLab, “We are positive on GTLB as an investment opportunity. The company’s large market opportunity in software development, security, and IT operations provides plenty of room for growth as GTLB expands its platform capabilities across the software development lifecycle. Our customer checks point to strong differentiation driving demand for the GitLab platform, as its ability to support diverse personas, interoperate across clouds, connect to third-party tooling, and support AI workloads enable customers to accelerate and automate their software delivery, improving productivity across 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.”
Altogether, these comments support Koenig’s Outperform (i.e. Buy) rating on the stock, while his $90 price target implies a one-year gain of more than 53.5%. (To watch Koenig’s track record, click here )
GitLab has picked up a lot of interest from the Street. The 23 recent analyst reviews split 20 to 3 in favor of Buy over Hold to back up the Strong Buy consensus rating. The shares are trading for $59.07 and their $80.43 average target price suggests the stock will gain 36% on the one-year horizon. (See GTLB stock forecast )
Datadog, Inc. ( DDOG )
Next up is Datadog, a leader in the field of real-time data analysis. The company offers cloud monitoring as a service, giving customers subscription access to a platform optimized to monitor systems infrastructure, app performance, access log, real users, and more.
Datadog’s service uses AI to automate these tasks, speeding up the process and enhancing the platform’s built-in scalability. Users have put Datadog’s products to work in smoothing out 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, particularly on the cloud.
Among the features that Datadog offers are tools designed for SaaS and cloud users and providers, AI-powered automation, intuitive monitoring instrumentation, bug tracking, and unified databases and server components. Using the company’s platforms and products, Datadog’s customers get a full range of visibility into the real workings 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 queries and give answers. This is a good example of one of the most profound changes that genAI tech is bringing to the digital world. By making natural language processors more effective and more intelligent, AI allows system users to bypass the need for code and talk to software systems in a more intuitive style. With Bits AI, Datadog brings this capability to bear on data analysis and cloud monitoring.
The success of Datadog’s products and business model is clear from the company’s last set of earnings results. For 3Q24, Datadog reported revenues of $690 million, up 26% from the prior year and more than $25 million better than the forecast. The company’s earnings figure, of 46 cents per share by non-GAAP metrics, was 6 cents per share over the estimates.
Datadog beat expectations on the outlook, too. For Q4, the company guided for revenues in the range of $709 million and $713 million, compared to consensus at $710.44 million, and to realize a non-GAAP EPS between $0.42 and $0.44 vs. the Street’s estimate of $0.40.
Summing up the positives on Datadog, analyst Koenig writes, “DDOG has been gaining share in a rapidly 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 large-language model (LLM) inferencing (with LLM Observability) and differentiate its workflow and analysis capabilities (with Bits AI and Toto). We like the prospects for continuing DDOG revenue growth (above the 20% level, especially as cloud spending has reaccelerated. Last, the company has strong fundamentals, with a 50+ ‘Rule of 40’ score supported by a differentiated competitive position and strong execution capabilities.”
Koenig goes on to set his own bottom line in unmistakably bullish tones: “We recommend investors buy DDOG based on near-term catalysts that could include significant FY25E revenue outperformance as the year progresses, continuing margin improvements, and consistent Rule of 40 score at 50+ points.”
His Outperform (i.e. Buy) recommendation comes along with a $200 price target that points toward an upside potential of 28% in the next 12 months.
This stock’s Strong Buy consensus rating is based on 30 recent reviews, which include 28 to Buy against just 2 to Hold. That said, the average price target of $158.43 suggests shares will stay rangebound for the time being. It will be interesting to see if analysts boost their price targets or downgrade their ratings shortly. (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’ equity insights.
Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment .
