AI-Powered Software Picks With 102% Upside: Why the Downturn Could Be Your Entry Point

Wall Street is painting an intriguing picture for investors navigating the software sector’s recent turbulence. While the S&P North American Technology Software Index has dropped 24% from its September 2025 peak—technically entering bear market territory—prominent analysts are seeing not gloom but genuine opportunity in two names: Datadog and Atlassian. Their price targets suggest potential returns of 102% and 170%, respectively, though the path to such gains deserves careful scrutiny.

The underlying thesis is compelling: despite fears that artificial intelligence coding tools will cannibalize software demand, Morgan Stanley’s latest CIO survey paints an optimistic picture. The bank’s fourth-quarter research indicates software will be the fastest-growing IT sector in 2026, with incumbent software vendors positioned as the “delivery mechanism” for generative AI features. That’s the backdrop transforming two established players into analyst favorites.

Datadog’s Observability Advantage: Building the 102% Case

Datadog has become Wall Street’s poster child for software upside, with analysts like Adam Shepherd of Arete Research setting a $260 price target—implying a 102% rally from the current $129 share price. The bull case centers on the company’s dominance in observability software, where it helps enterprises monitor critical IT infrastructure and applications across sprawling digital environments.

What makes Datadog relevant to the AI era is its Watchdog engine, an AI system that automates anomaly detection, incident alerts, and root cause analysis. This capability addresses a growing headache for IT teams: the explosion of monitoring data that now exceeds human processing capacity. Forrester Research recently ranked Datadog as a leader in AI for IT operations, validating its AI credibility. Gartner has similarly highlighted the company’s strengths in digital experience monitoring and LLM performance tracking.

But here’s where the 102% thesis gets tested by reality. Datadog’s financial trajectory is solid yet not explosive. Third-quarter revenue reached $886 million (up 28%), while remaining performance obligations jumped 53% to $2.8 billion. Non-GAAP net income grew 20% to $0.55 per diluted share—a respectable pace, but notably slower than revenue growth. Wall Street models 19% annual adjusted earnings growth through 2028, translating to a current valuation of 66 times earnings.

That multiple is steep. Yes, Datadog has beaten consensus by an average of 13% over the last six quarters, and the upcoming rollout of AI agents could sustain momentum. Yet claiming 102% returns in the next year feels optimistic unless the company accelerates earnings growth meaningfully or the multiple re-rates higher—both uncertain propositions. For patient investors, a position makes sense; those seeking the full 102% upside might be waiting for a more attractive entry point, ideally 20% lower.

Atlassian’s Work Management Edge: Can 170% Be Real?

Keith Weiss at Morgan Stanley has raised Atlassian to a $320 target price, implying 170% upside from its current $118 share price. The case rests on Atlassian’s unmatched position in work management software, anchored by Jira—the de facto standard for software development and DevOps teams.

What distinguishes Atlassian is its expansion beyond technical users. Jira has gained meaningful traction with marketing, human resources, and finance teams, creating a rare multi-department TAM expansion. Gartner ranked Atlassian as a leader in work management software for both DevOps teams and marketing teams—a distinction no competitor achieved. Forrester also recognizes its leadership in enterprise service management.

The AI dimension comes through Rovo, Atlassian’s generative AI assistant. For technical teams, Rovo assists with code generation and review. For non-technical teams, it surfaces insights and automates repetitive workflows. Last year, Gartner identified Atlassian as an emerging leader in generative AI, a credible validation.

Financially, Atlassian presented encouraging September quarter results: revenue climbed 21% to $1.4 billion, RPO surged 42% to $3.3 billion, and non-GAAP earnings jumped 35% to $1.04 per diluted share. Most notably, CEO Mike Cannon-Brookes disclosed that monthly active users engaging AI capabilities topped 3.5 million, up over 50% year-over-year. Wall Street forecasts adjusted earnings growth at 22% annually through June 2027.

Here’s the critical difference from Datadog: Atlassian trades at 30 times earnings, a multiple notably lower and more defensible. At 63% below its peak, the stock has already absorbed significant pessimism about AI disruption. The 170% target would require exceptional execution over multiple quarters, but unlike the 102% Datadog target, it doesn’t feel absurdly stretched relative to the company’s fundamentals and growth runway.

The Software Sector’s Transformation

Both investment theses hinge on a shared conviction: software vendors won’t be disrupted by AI; they’ll be transformed by it. Rather than losing customers to AI coding tools, companies like Datadog and Atlassian are embedding AI into their core offerings, making those tools more valuable and harder to replace. That thesis appears validated by strong enterprise adoption signals, particularly the explosive 50%+ growth in Atlassian’s AI-engaged user base.

The software bear market may be less about structural doom and more about valuation correction and investor repositioning. With the sector expected to lead IT spending growth in 2026, the current downturn resembles a buying opportunity for investors willing to distinguish between quality compounders and mediocre businesses.

Making Your Move

For investors considering these two AI-powered stocks, the 102% and 170% targets represent analyst scenarios, not guarantees. Datadog’s case requires earnings acceleration or multiple expansion; Atlassian’s case requires sustained execution but sits on more reasonable valuation fundamentals. Between the two, Atlassian appears to offer a more balanced risk-reward at current levels, though both merit consideration for growth-focused portfolios willing to endure near-term volatility. The software sector’s downturn may ultimately prove the best time to buy, not the moment to sell.