Artificial intelligence (AI) moves hard and fast. Since the launch of OpenAI’s ChatGPT, investors have wondered just how many different jobs AI could displace and in which industries. With the release of Anthropic’s Claude Cowork tool, which can autonomously execute tasks on a computer normally done by various software applications, Claude is now acting more like a teammate than a chatbot. All eyes are now on software — which, not long ago, was considered one of the best sectors in the market.
Since Dec. 10, the iShares Expanded Tech-Software Sector ETF has fallen by over 22% (as of Feb. 3), officially putting software stocks in bear market territory. While the market is clearly worried, Wall Street analysts think the sell-off might be overdone and that some software stocks offer compelling opportunities.
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Here are three software stocks with average price targets implying 47% to 63% upside, according to Wall Street analysts.
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The cloud monitoring and security software company Datadog(NASDAQ: DDOG) has seen its stock hammered since hitting nearly $200 per share in early November. It recently traded around $120.
The company offers a range of capabilities, including monitoring infrastructure such as servers, detecting threats and potential breaches, and tracking user interactions, all of which can help improve cloud performance. While it’s easy to envision AI taking over some of these functions or leading to more competition, it’s also quite likely that companies like Datadog will use AI to further automate their operations, create new capabilities, and open new lines of business.
Companies like Datadog are keenly aware of the biggest problems their customers face and are highly innovative. D.A. Davidson analyst Gil Luria wrote in a recent research note, “Nothing about the software business model has actually changed.” Wall Street estimates currently project the company to grow revenue by 20% in 2026.
Luria also said he believes these companies will capitalize on the AI boom. In November, Luria said in a research note that Datadog had announced a nine-figure annual deal with a large AI customer, which many perceived to be OpenAI.
Of the 33 Wall Street analysts who have issued research notes on the company, 30 have a buy rating, two have a hold rating, and one has a sell rating. The average price target now implies 61% upside, according to the market researcher TipRanks.
Snowflake(NYSE: SNOW), another data-intensive business, went public in late 2020 and has previously been a market darling. The company stores immense amounts of data and enables businesses to analyze it in various ways, while also allowing them to share and store it securely. The platform can be used across different clouds, including Amazon Web Services, Microsoft Azure, and Alphabet‘s Google Cloud.
Snowflake has struggled to convince investors that it has a prudent AI strategy. Furthermore, the company is not yet profitable, has disappointed investors with its recent guidance, and trades at a high valuation. So, if growth is not obvious and there is competition from the likes of AI, it’s easy to see why investors could be worried.
But CEO Sridhar Ramaswamy recently told Business Insider that the biggest mistake people are making when thinking about AI is that it is an all-or-nothing proposition. Rather, AI is likely to be more subtle and be used for certain circumstances, he said. Furthermore, Snowflake has struck partnerships with AI darlings like Palantir Technologies and recently completed a $200 million deal with OpenAI, so it seems like the big AI companies find many software companies to be useful.
Of the 33 Wall Street analysts who have issued research reports in the past three months, 30 have a buy rating on the stock, with three recommending a hold. The average price target implies nearly 63% upside, according to TipRanks.
It feels odd to call Microsoft a software stock, given that it’s expected to be one of the largest beneficiaries of the AI boom. But the stock is down over 23% in the past six months and has many software businesses under its umbrella, including its suite of office products, such as Excel and Word, all bundled on the Microsoft 365 platform.
The stock sold off immensely after Jan. 28, 2026, when the company reported second-quarter earnings for its fiscal 2026. The sell-off stemmed from lower-than-expected growth in Microsoft’s all-important Azure cloud business, which accounts for much of the company’s AI-related revenue right now. Investors have set a high bar for hyperscalers, given all of the capital expenditures Microsoft has allocated to AI infrastructure.
Analysts at UBS noted that Microsoft 365 revenue growth has not sped up, despite the company announcing that its AI assistant, Copilot, has 15 million paid users. Copilot leverages AI to automate tasks within the 365 platform.
This goes to show that while software stocks are selling off on AI fears, the technology isn’t necessarily replacing or even bolstering software in all cases. AI companies have also faced a myriad of concerns in recent months.
Many on Wall Street still see Microsoft as one way to gain exposure to AI, if not the top way. Of 35 Wall Street analysts who have issued research reports on the company in the past three months, 34 have a buy rating, and one has a hold rating. The average price target implies nearly 47% upside, according to TipRanks, which is a huge implied move for one of the largest companies by market cap.
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Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, Datadog, Microsoft, Palantir Technologies, and Snowflake. The Motley Fool has a disclosure policy.
