Ark Invest, a firm renowned for its focus on disruptive technologies, projects a significant rise in software sales driven by artificial intelligence. They anticipate sales to surge from $1.1 trillion to an impressive $13 trillion by 2030. This projection implies an annual growth rate nearing 50%, translating to a staggering increase of 1,080% by the end of the decade. For investors looking to seize this substantial growth opportunity, Datadog and ServiceNow emerge as two highly regarded AI stocks backed by strong Wall Street support. Datadog stands out with 86% of 43 analysts rating it a buy, while the remainder hold their position. Similarly, ServiceNow gains a nod of approval from 90% of 40 analysts, with a marginal 3% suggesting selling it.
Datadog offers observability software through a platform encompassing nearly two dozen applications tailored to monitor, analyze, and troubleshoot IT infrastructure performance. The information collected is utilized by Watchdog, an AI engine designed to accelerate incident resolution by detecting anomalies, providing insights, and automating root cause analysis. Datadog's prowess in the sector was affirmed by Gartner, which recognized it as a leader among observability platform vendors for four consecutive years. This achievement underscores the appeal of its software among enterprises seeking elite solutions. In addition to observability, Datadog has a notable presence in cloud infrastructure, log monitoring, and server monitoring. This comprehensive portfolio not only opens up cross-selling opportunities but provides businesses the convenience of acquiring multiple capabilities from a single platform.
With the rising demand for AI software, one of its newer products, LLM Observability, offers a glimpse into vast opportunities. In its second quarter, Datadog surpassed Wall Street expectations, reporting revenue hikes of 27% to $645 million, along with a 48% increase in non-GAAP earnings. This growth stemmed from a 10% customer increase and growing expenditure from existing clients. Forecasts for the full year suggest a 23% revenue increase in 2024. While earnings predictions vary due to Datadog's young status and its aggressive investments, the company's market value is projected using the price-to-sales ratio. Despite a valuation at 19.7 times sales, which is less than the three-year average of 23.8, the stock remains reasonably priced given its untapped market potential.
ServiceNow offers software designed to digitize business workflows. Primarily recognized for its IT applications, the platform extends its offerings to include customer service management, human resources delivery, application development, and finance and supply chain workflows, among others. AI has long been integrated into ServiceNow’s offerings; predictive intelligence, AI search features, and virtual agents enhance user decision-making, information retrieval, and automate customer service. Recently, ServiceNow introduced 'Now Assist', a suite of generative AI tools aimed at summarizing and drafting text.
Its dominance spans IT service management, IT asset management, and AI operations. ServiceNow's leadership is further acknowledged in service areas like multicloud management, process automation, and customer service solutions. IDC analysts predict that strategic investments and collaborations with Nvidia will secure ServiceNow's innovative edge over many years. The second quarter witnessed ServiceNow exceed Wall Street’s expectations with a 22% revenue leap to $2.6 billion, driven partly by its generative AI products. Non-GAAP net income grew by 32%, while a 98% renewal rate and a 31% increase in remaining performance obligation highlighted future revenue potential.
Wall Street remains optimistic, forecasting an adjusted earnings growth of 20% annually through 2025. While its valuation at 72 times earnings might seem steep, ServiceNow is expected to surpass these estimates since its addressable market could soar to $275 billion by 2026. CEO Bill McDermott has pointed out that 'Now Assist' is the fastest-growing product in the firm’s history. Prospective investors with patience can consider acquiring a modest position in ServiceNow, with an outlook to buy more should the share price dip.
