While darlings of the pandemic-era boom, software stocks have come under fire in recent years. That's been due to two main reasons -- the rapid rise in interest rates following the pandemic, and the potential disruption from generative AI.
GenAI has as much potential to disrupt certain software companies as it does to enhance their businesses, so it's important to choose wisely in this field. Scanning commentary across the recent second quarter earnings season, the following software leaders appear to be gaining the upper hand over competitors in the age of GenAI. Therefore, they should be stocks of focus for software investors everywhere in the years ahead.
NASDAQ: CRWD
Key Data Points
CrowdStrike
CrowdStrike (CRWD +2.56%) had a rough month of July, when a buggy software update didn't mix well with the Windows operating system, causing worldwide outages and severe business disruption.
Yet importantly, the outage wasn't related to a security breach, but rather compatibility issue that was self-inflicted. Meanwhile, the company's stronger-than-expected results and guidance delivered on Aug. 28 seemed to show CrowdStrike's resilience even to this huge PR disaster. That just goes to show the power of CrowdStrike's AI-powered business model and its status as a top-tier emerging player in the cybersecurity realm.
CrowdStrike, founded in 2011, had AI in mind at conception. The company's original endpoint protection product would deter breaches and send data back to CrowdStrike's centralized threat graph in the cloud, which would use that data to constantly improve algorithms and stay one step ahead of the bad guys.
This is essentially "crowdsourcing" data that would consistently upgrade the entire installed base to reflect that new information. So CrowdStrike's algorithms grew more sophisticated as the company grew, in a beneficial network effect.
Recent results have shown that, along with some discounts to affected customers, customers are largely willing to look past the unfortunate incident from July 19 in light of this superior operating model.
Additionally, the past quarter's results show new AI capabilities catching on, especially in some of CrowdStrike's newer products. CEO George Kurtz pointed to two big customer wins that occurred after July 19, in the company's relatively new AI-powered SIEM (security information and event management) product. SIEM correlates first and third-party data to pre-empt intrusions before they happen, and CrowdStrike has updated its SIEM product under the same unified Falcon AI platform for the new generation.
One of the recent customer wins was actually an expansion with an unnamed generative AI company, showing even the most sophisticated AI companies are choosing CrowdStrike -- even after July 19. All in all, Kurtz pointed to CrowdStrike's newer products in SIEM, identity protection, and cloud security as "hypergrowth" areas, as this cohort of products grew 85% year over year, playing a big part in the company's 32% overall revenue growth.
Now that CrowdStrike has a full suite of cybersecurity products beyond just endpoint protection, look for enterprises to standardize more on CrowdStrike's platform in the age of AI.
MongoDB
Database company MongoDB (MDB +4.09%) plunged earlier this year when it guided for a slowdown. One might have thought MongoDB would be in pole position in the AI era, as its innovative document architecture is much better-suited to handle different types of unstructured data useful for AI than the traditional row-and-format approach.
This should hold true going forward, but management attributed the slowdown to enterprises spending on AI infrastructure today, before they invest in AI-powered software apps. And it's the construction and usage of AI-powered apps that will really benefit MongoDB financially.
But MongoDB's second quarter results came in much better than its initial guidance, up a respectable 13% on the year, with its Atlas database-as-a-service offering up 27%. As a result, the stock catapulted 18% higher on Friday, August 30.
While those results were better than forecast, management expects much more benefit from the AI revolution. CEO Dev Ittycheria said AI's realized benefits for MongoDB were a question of when, not if. Given that data is the fuel for AI and thus AI applications, MongoDB sees strong growth potential for databases generally and MongoDB specifically.
One area where AI has the potential to turbocharge MongoDB's results is in modernizing legacy applications. The process of migrating data over from legacy databases then rewriting old application code is cumbersome and risky. So although MongoDB has managed to catch on with lots of young enterprises starting with a "clean sheet of paper," this factor has limited MongoDB's ability to modernize legacy apps at large companies.
But generative AI is changing that, making the migration process easier and a lot less risky. That has the potential to open up a huge segment of the market for MongoDB. Ittycheria noted on the conference call with analysts:
The early results from these pilots are very exciting as our customers are experiencing significant reductions in time and cost of modernization. In particular, we have seen dramatic improvements in time and cost to rewrite application code and generate test suites. We see increasing interest from customers that want to modernize their legacy application estate, including large enterprise customers.
The overall database industry is an $80 billion-plus industry, but MongoDB's revenue over the past 12 months was only $1.82 billion. With the AI transition fitting its document database architecture and helping unlock opportunities at large enterprises, look for MongoDB to achieve big share gains as the AI transition picks up in the years ahead.
