The S&P North American Technology Software Index, which tracks 111 software stocks, has fallen 24% from the record high it reached in September 2025. That puts the index in bear market territory. Investors are worried that artificial intelligence (AI) coding tools will limit demand for software in the future.
I think the market is too pessimistic. Morgan Stanley's fourth-quarter CIO survey suggests software will be the fastest-growing IT sector in 2026. "CIO survey data affirms our view on incumbent software vendors benefiting from this disruption, as they will ultimately serve as the delivery mechanism" for new generative AI features.
With that in mind, certain Wall Street analysts forecast triple-digit upside in Datadog (DDOG 0.05%) and Atlassian (TEAM 3.79%):
- Adam Shepherd at Arete Research recently raised his target price on Datadog to $260 per share. That implies 102% upside from the current share price of $129.
- Keith Weiss at Morgan Stanley recently set his target price on Atlassian at $320 per share. That implies 170% upside from its current share price of $118.
Here's what investors should know about Datadog and Atlassian.
Image source: Getty Images.
Datadog: 102% implied upside
Datadog develops observability software. Its platform includes two dozen products that help businesses monitor the performance of critical IT infrastructure and applications. It also features an artificial intelligence (AI) engine called Watchdog that automates anomaly detection, incident alerts, and root cause analysis to help teams resolve problems more quickly.
Artificial intelligence should be a tailwind for Datadog. Forrester Research recently ranked the company as a leader in AI for IT operations, a technology that uses machine learning to help IT teams keep infrastructure and applications functional. Also, Gartner has recognized its leadership in digital experience monitoring and observability platforms, highlighting AI features and performance monitoring for large language models.
Morgan Stanley analyst Keith Weiss says Datadog's ability to consolidate a broad range of performance monitoring tools on a single platform, something that has become a top priority for many IT departments, has made the company "the top share gainer in its core observability market."
Datadog reported encouraging third-quarter financial results that beat estimates on the top and bottom lines. Revenue increased 28% to $886 million and remaining performance obligation (RPO) increased 53% to $2.8 billion. Meanwhile, non-GAAP net income rose 20% to $0.55 per diluted share. Importantly, bottom-line growth was less impressive than top-line growth due in large part to heavy R&D spending.
Wall Street estimates Datadog's adjusted earnings will grow at 19% annually through 2028. That makes the current valuation of 66 times earnings look rather expensive. However, the company beat the consensus estimate by an average of 13% in the last six quarters, and the ongoing rollout of AI agents could keep that momentum intact.
Nevertheless, I doubt Datadog stock will return 102% in the next year, and shares would look a lot more attractive if the price dropped 20%. Patient investors can buy a position today, but I would keep that position small until the valuation is more reasonable.
NASDAQ: TEAM
Key Data Points
Atlassian: 170% implied upside
Atlassian develops work management and service management software. The company is best known for Jira, a product that helps teams plan, track, and collaborate on projects. Jira is the industry standard among software development and operations (DevOps) teams, but it has also gained traction with non-technical teams like marketing, human resources, and finance.
Gartner recently ranked Atlassian as a leader in work management software for DevOps teams and marketing teams. No other company was ranked as a leader in both categories. And Forrester Research has recognized its leadership in enterprise service management. Strength in all three markets is a key advantage because it lets Atlassian win and upsell customers across multiple departments.
The company has supercharged its work management and service management tools with a generative AI assistant called Rovo. For DevOps teams, Rovo helps generate, review, and clean code. For non-technical teams, Rovo can surface insights and automate workflows. Last year, Gartner ranked Atlassian as an emerging leader in generative AI technologies.
Atlassian reported solid financial results in the September quarter. Revenue increased 21% to $1.4 billion, while RPO jumped 42% to $3.3 billion. Non-GAAP earnings increased 35% to $1.04 per diluted share. CEO Mike Cannon-Brookes said the number of monthly active users that engaged AI capabilities increased more than 50% to 3.5 million.
Wall Street estimates adjusted earnings will increase at 22% annually through the fiscal year ending in June 2027. That makes the current valuation of 30 times earnings look quite reasonable. With shares down 63% from the high due to concerns about AI, Atlassian is an attractive buy, though 170% returns would require truly exceptional financial results for several consecutive quarters.
