A few years ago, cloud computing revolutionized the software industry, transitioning users from purchased licenses to subscription-based services, establishing the software-as-a-service (SaaS) model. Today, we’re witnessing another transformative shift: the rise of generative artificial intelligence (AI). While the full impact remains to be seen, the implications for the software landscape and investment opportunities are significant.
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AI’s Impact on the Software Industry
This evolution in the software industry presents compelling opportunities for investors. Macquarie analyst Steve Koenig characterizes the current market as an opportune buying point.
“The accelerating cloud revenue trends at major hyperscalers are positive indicators for the software sector,” Koenig explains. “Customers, having largely navigated cloud spending optimization efforts, are now investing in digital transformation, cloud migration, and AI. These AI investments are propelling growth across the technology stack, from GPUs to infrastructure-as-a-service (IaaS), platform-as-a-service (PaaS), and applications.”
Koenig highlights two AI-driven software companies poised for growth. Let’s delve into their prospects, leveraging insights from TipRanks database to understand the broader market sentiment.
GitLab (GTLB): A Unified Platform for DevSecOps
GitLab provides an AI-powered DevSecOps platform built on open-source code and utilizing a freemium model. This allows for community contributions to the platform’s core code while offering paid subscriptions for premium features and specialized tools.
GitLab’s platform consolidates all DevSecOps tools into a single unified environment, streamlining workflows. Its integrated AI, known as Duo, assists users throughout the software development lifecycle, offering real-time support, troubleshooting solutions, and vulnerability detection.
With over 40 million registered users and $175 million in subscription revenue in its last reported quarter (fiscal 3Q25), GitLab demonstrates substantial market traction. Total revenue reached $196 million, a 31% year-over-year increase, exceeding forecasts by $7.75 million. Notably, GitLab achieved positive free cash flow of $9.7 million, a significant improvement from the previous year.
Koenig is bullish on GitLab, citing its “large market opportunity in software development, security, and IT operations” and “strong differentiation driving demand.” He emphasizes the platform’s ability to support diverse user roles, interoperate across cloud environments, integrate with third-party tools, and support AI workloads.
Koenig’s Outperform rating and $90 price target suggest a potential upside of over 53.5%. The broader market shares this optimism, with a Strong Buy consensus rating based on 23 recent analyst reviews.
Datadog (DDOG): Real-Time Data Analysis and AI-Powered Monitoring
Datadog is a leading provider of real-time data analysis and cloud monitoring services. Its platform offers comprehensive monitoring of system infrastructure, application performance, user activity, and more, leveraging AI for automation and scalability.
Datadog’s AI-powered features facilitate digital transformation, cloud migration, team collaboration, and efficient troubleshooting. Its Bits AI platform, an interactive AI assistant, utilizes natural language processing to answer user queries, showcasing the transformative potential of generative AI in data analysis.
Datadog’s recent financial performance reinforces its market strength. In 3Q24, the company reported $690 million in revenue, a 26% year-over-year growth and exceeding expectations by over $25 million. Non-GAAP earnings per share of $0.46 also surpassed estimates. Furthermore, Datadog provided optimistic Q4 guidance, further solidifying its positive outlook.
Koenig highlights Datadog’s “gaining share in a rapidly growing observability market,” attributing its success to a user-friendly experience, a unified platform, multi-product adoption, and expanding capabilities. He commends the company’s embrace of AI, particularly its LLM Observability and Bits AI, for enhancing workflow and analysis capabilities.
Koenig recommends buying DDOG, with a $200 price target indicating a potential 28% upside. The market consensus aligns with this bullish sentiment, reflecting a Strong Buy rating based on 30 recent analyst reviews.
Conclusion: Investing in the AI-Driven Future of Software
The transformative power of generative AI is reshaping the software industry, creating significant investment opportunities. Companies like GitLab and Datadog, leveraging AI to deliver innovative solutions, are well-positioned for continued growth in this dynamic landscape. As AI continues to evolve, staying informed about these advancements and understanding their impact on the market will be crucial for investors seeking to capitalize on this emerging technological revolution.
