Software Is the Next Big AI Opportunity: 1 AI Stock Highly Recommended by Wall Street to Buy Now

Group 1: AI Boom Phases - Goldman Sachs identifies three phases of the AI boom: the first phase focuses on semiconductor companies like Nvidia, the second on infrastructure companies such as Microsoft and Amazon, and the third on software companies [1][2]. Group 2: Datadog Overview - Datadog is a leader in observability software, offering a platform with around two dozen products that assist businesses in monitoring, analyzing, and resolving performance issues across applications and infrastructure [3][4]. - The company's observability software is built on an AI engine that automates alerts, insights, and root cause analysis, enhancing incident resolution [3]. Group 3: Market Position and Financial Performance - Datadog's broad product portfolio allows businesses to consolidate spending through a single platform, making it easier than integrating multiple vendor tools, which has contributed to its leadership in the market [4]. - The demand for observability software is increasing due to the complexity of computing environments, driven by cloud migration and the rise of AI, benefiting Datadog [5]. - In Q3, Datadog reported a 26% increase in revenue to $690 million, with a 9% rise in customer count to 29,200 and over 10% growth in average spend per existing customer [6][7]. Group 4: AI Revenue Contribution - AI companies now account for 6% of Datadog's annualized subscription revenue, up from 4% in the previous quarter and less than 3% a year ago, indicating a growing trend as the AI boom progresses [8]. - Datadog has maintained a net revenue retention rate in the mid-110% range for five consecutive quarters, suggesting that existing customers are increasing their spending at a faster pace [9]. Group 5: Valuation and Growth Outlook - Analysts project that Datadog's adjusted earnings will grow at an annual rate of 50% through 2026, although the current valuation of 150 times adjusted earnings is considered expensive [10]. - Investors are advised to consider building a small position in Datadog, with the understanding that the stock may decline significantly if expectations are not met or if the broader market experiences a correction [11].