Ark Invest, an investment manager focused on disruptive technologies, believes that artificial intelligence could increase software sales from $1.1 trillion today to $13 trillion by 2030. That forecast implies annual growth of nearly 50%, so that total spending by could rise by 1,080% by the end of this year. the decade.
Investors looking to take advantage of this huge opportunity should consider it Data hound (NASDAQ:DDOG) And ServiceNow (NYSE: NOW)two software stocks that are highly valued by Wall Street.
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Of the 43 analysts covering Datadog, 86% rate the stock as Buy and the remaining 14% rate the stock as Hold.
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Of the 40 analysts following ServiceNow, 90% rate the stock as a buy, 8% as a hold and 3% recommend selling the stock.
Here’s what investors need to know.
1. Date dog
Datadog sells observation software. The platform includes nearly twenty applications that allow companies to monitor, analyze and resolve performance issues in their IT infrastructure. These products feed information to Watchdog, an artificial intelligence (AI) engine that accelerates incident resolution by detecting anomalies, surfacing insights and automating root cause analysis.
In August, advice Gartner recognized Datadog as a leader among observability platform providers for the fourth consecutive year, noting that the software “resonates well with companies looking for best-in-class solutions.” Datadog also has a strong presence in other software verticals, including cloud infrastructure monitoring, log monitoring and server monitoring.
Datadog’s robust portfolio is a key advantage. Not only does it create cross-sell opportunities, but companies typically prefer the simplicity of comprehensive platforms over the complexity of purchasing products from multiple suppliers. One new product represents a major opportunity given the growing demand for AI software: LLM Observability is a performance monitoring solution for large language models and generative AI applications.
Datadog delivered second-quarter financial results that were both above and below Wall Street expectations. Revenue rose 27% to $645 million and non-GAAP earnings rose 48% to $0.43 per diluted share. These figures reflect a 10% increase in customer numbers and an increase in spend per existing customer in the mid-teens. Management also raised full-year guidance, with revenue expected to grow 23% in 2024.
Looking ahead, Wall Street analysts’ earnings estimates vary widely, as Datadog is still a relatively young company that is investing aggressively in product development and marketing. For that reason, it makes more sense to value the shares based on the price-sales ratio. And at 19.7 times sales — a discount to the three-year average of 23.8 times sales — the stock isn’t cheap, but the price is reasonable considering the company has less than 5% of its $51 addressable market billion has been tapped.
2. ServiceNow
ServiceNow supplies software that digitizes business processes. Although the platform is best known for its IT applications, it also includes products for (1) customer workflows such as customer service management, (2) employee workflows such as human resources delivery, (3) maker workflows such as application development and process automation, and (4) financial and supply chain workflows such as purchasing.
ServiceNow has been building AI into its software for years. For example, predictive intelligence makes recommendations on what action users should take to resolve issues, AI search helps users quickly find answers to questions, and virtual agents automate customer service interactions. More recently, ServiceNow debuted a suite of generative AI tools called Now Assist that summarize information and compose text.
ServiceNow is a leader in IT service management, IT asset management and AI for IT operations software. Analysts have also recognized its leadership in other verticals, such as multi-cloud and hybrid cloud management, digital process automation and customer service solutions. “Recent investments in generative AI and partnerships with Nvidia will keep ServiceNow at the forefront of innovation for years to come,” IDC analysts wrote in June.
ServiceNow reported second-quarter financial results that exceeded Wall Street expectations at both the top and bottom lines. Revenue rose 22% to $2.6 billion, driven in part by momentum with generative AI products, and non-GAAP net income rose 32% to $3.13 per diluted share. The company also recorded a 98% renewal rate and remaining performance obligation increased by 31%, indicating strong revenue growth in the coming quarters.
Wall Street expects ServiceNow’s adjusted profits to rise 20% annually through 2025. That makes the current valuation of 72 times adjusted earnings seem a bit pricey. But I think ServiceNow will grow faster than expected, as management believes the addressable market will reach $275 billion by 2026, and Now Assist is “the fastest-growing new product in the company’s history,” according to CEO Bill McDermott.
Patient investors should feel comfortable buying a small position in this AI software stock at its current price. In the likely event that the stock pulls back at some point, investors should consider buying more shares during the dip.
Should you invest $1,000 in Datadog now?
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Trevor Jennevine has positions at Nvidia. The Motley Fool holds and recommends positions in Datadog, Nvidia, and ServiceNow. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
AI Software Sales Could Soar 1,080%: 2 Brilliant AI Stocks to Buy Right Now That Are Highly Rated by Wall Street Originally published by The Motley Fool
