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BofA Securities Names Datadog, Atlassian as Top Software Picks Ahead of Earnings
BofA Securities has identified infrastructure software as an attractive and durable sector heading into the third-quarter earnings season, highlighting Datadog and Atlassian as top picks poised to benefit from accelerating artificial intelligence adoption.
AI Tailwinds Bolster Sector Outlook
In a new analyst note, BofA stated that it expects the upcoming earnings cycle to demonstrate that infrastructure software remains more resilient and shows greater AI benefits than other software subsectors. The firm's industry checks and data analysis indicate that demand is increasing, with AI becoming a more significant contributor to growth and platform usage.
According to BofA, companies that can successfully prove AI is a positive growth tailwind are likely to see their stocks rerate, even with existing premium valuations. Reflecting this positive outlook, the firm raised its price objectives for several companies in the space, including Datadog (DDOG), Atlassian (TEAM), Elastic (ESTC), and PagerDuty (PD), among others.
Top Pick: Datadog (DDOG)
BofA Securities identified Datadog (DDOG) as a top pick, calling it the "best share gainer in a faster-growing total addressable market." The firm believes the observability market is expanding more rapidly than previously anticipated, driven by enterprise AI acceleration and a ramp-up in consumer agents.
AdFor Datadog's upcoming report, BofA noted that the key metric for investors is total revenue growth. The firm models 28.7% growth, while the consensus Street estimate is 29.1%. The note also pointed to Datadog's security business as an underappreciated growth driver, which recently surpassed $100 million in annual recurring revenue with its year-over-year growth accelerating into the mid-50s percentage range. BofA maintained its Buy rating on DDOG and raised its price objective to $335.
Top Pick: Atlassian (TEAM)
Despite Atlassian (TEAM) stock surging more than 280% from its April trough, BofA believes there is still room for the stock to move higher. The firm sees potential for a further rerate if the company's results confirm its status as a long-term AI beneficiary.
The key metric for Atlassian's earnings will be Cloud revenue growth, for which BofA and the Street are modeling 28.5% and 28.9%, respectively. BofA analysts suggested the market may be underappreciating the value of Atlassian’s "two decades of work context," which they see as a critical asset for developing more efficient and lower-cost AI solutions.
The firm reiterated its Buy rating on TEAM and increased its price objective to $252 from a previous $210.
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