Bank of America By Investing.com says this software stock ‘will benefit greatly from AI.’

Bank of America analysts defended one software name whose stock price has fallen in recent weeks.

Datadog (NASDAQ:) reported financial results for its first quarter of fiscal 2024 that topped Wall Street expectations.

The observability and security company reported first-quarter net income of $42.6 million, or 12 cents per share, compared with a net loss of $24.1 million, or 8 cents per share, a year ago.

On an adjusted basis, Datadog earned 44 cents per share, beating the FactSet consensus of 34 cents.

Revenue was $611 million, up 27% from a year ago, while analysts had expected $590 million.

Despite this, the company’s stock price fell more than 10% after publication.

“We find that 27% year-on-year revenue growth in the first quarter of 2024 is not sufficient to be a catalyst. However, there is a lot to like about the results that support our long-term optimism,” Bank of America analysts said.

“First, our remaining performance obligations (RPO), a good indicator of long-term customer commitment, increased 52% year-on-year. “This, along with the Big Deal commentary, suggests that Datadog could benefit from artificial intelligence (AI) and digital innovation in the long term,” he added.

However, BofA warns that the risk/reward scenario may remain in the balance until companies transition from “should benefit from AI” to “should actually benefit from AI.”

The bank said the most notable surprise in the report was that Datadog’s net new annual recurring revenue (ARR) was the highest since the fourth quarter of 2021.

This is especially important considering that ARR is considered one of the most reliable indicators of future growth in software.

Analysts estimate that Datadog’s ARR increased 27% year-over-year, an acceleration from its previous 24% growth rate. They expect ARR growth to continue to exceed the infrastructure peer average of 15% over the medium term.

“Some may struggle with why AI is not growing faster as a % of total ARR (this metric is mostly for Gen AI-based companies like OpenAI),” Bank of America analysts said.

“But the real AI growth driver for Datadog will not be AI, but rather when enterprises deploy AI applications at scale,” they continued.

Currently, most generative AI workloads are related to training and proof-of-concept activities. The BofA team said Datadog will benefit as AI applications are deployed and inference workloads scale.

Analysts reaffirmed their Neutral rating on DDOG and lowered their 12-month price target from $144 to $143.

Datadog expects revenue between $620 million and $624 million for the second quarter, with adjusted earnings per share between 34 cents and 36 cents. Analysts tracked by FactSet had estimated revenue of $617 million and adjusted EPS of 34 cents.