Beyond the Software Bear Market: AI Leaders Present Significant Growth Potential

The technology sector faces a challenging period as the S&P North American Technology Software Index has slid 24% from its September 2025 peak, entering bear market conditions. Yet beneath the pessimism lies an intriguing paradox: while investors worry that artificial intelligence coding tools might cannibalize software demand, compelling evidence suggests the opposite trajectory. Morgan Stanley’s latest CIO survey indicates software will remain the fastest-growing IT sector through 2026, with incumbent vendors positioned as critical delivery mechanisms for next-generation AI capabilities.

This backdrop sets the stage for two software companies that analysts believe offer outsized opportunity: Datadog and Atlassian, with Wall Street projecting potential gains of 102% and 170% respectively over the coming year.

The Bear Market Disconnect: Why Market Pessimism Misses the Mark

The software industry’s current bear market stems partly from legitimate concerns about disruption. Yet the narrative overlooks a critical reality: established software companies aren’t passive targets but active beneficiaries of AI’s expansion. Rather than competing directly with AI coding tools, platforms like Datadog and Atlassian are integrating these capabilities into their ecosystems.

Morgan Stanley’s research team emphasizes this evolution, noting that “incumbent software vendors will ultimately serve as the delivery mechanism” for enterprise AI adoption. This positions leading software companies not as threatened by artificial intelligence, but as essential infrastructure for its deployment.

Datadog’s Observability Advantage: A 102% Upside Play

Datadog specializes in observability software—a platform helping enterprises monitor critical infrastructure and applications across complex digital environments. The company’s technological moat has widened through its proprietary AI engine, Watchdog, which automates anomaly detection, incident alerts, and root cause analysis to accelerate problem resolution.

Third-quarter financial results underscore this momentum. Revenue climbed 28% to $886 million, while remaining performance obligation (RPO) surged 53% to $2.8 billion, indicating strong customer commitment. Non-GAAP net income rose 20% to $0.55 per diluted share, though earnings growth trails revenue growth due to substantial R&D investment in AI capabilities.

Industry recognition reinforces Datadog’s trajectory. Forrester Research ranks the company as a leader in AI for IT operations—technology leveraging machine learning to maintain infrastructure reliability. Gartner similarly recognizes Datadog’s leadership across digital experience monitoring and observability platforms, emphasizing its advanced AI features and large language model performance tracking.

Analyst Adam Shepherd at Arete Research recently elevated his Datadog price target to $260 per share—a 102% increase from the current $129 level. Shepherd’s thesis hinges on Datadog’s market consolidation advantage; as IT departments prioritize consolidating fragmented monitoring tools onto single platforms, Datadog has captured the top share-gain position in its observability market. Wall Street forecasts adjusted earnings growth of approximately 19% annually through 2028.

The valuation challenge remains: at 66 times earnings, Datadog appears expensive by traditional metrics. However, consistent outperformance—beating consensus estimates by 13% on average over the past six quarters—suggests the company’s AI-driven innovation may justify premium pricing. Still, investors seeking more attractive entry points might wait for a 20% price pullback before accumulating positions.

Atlassian’s Work Management Renaissance: 170% Potential Unlocked

Atlassian occupies a distinctive market position through Jira, the de facto standard for software development and DevOps teams worldwide. Yet the company’s reach extends beyond technical departments. Marketing, human resources, and finance teams increasingly adopt Jira for project planning and collaboration, creating multiple expansion vectors.

The company’s recent integration of Rovo—a generative AI assistant—magnifies this opportunity. For DevOps teams, Rovo generates, reviews, and refines code. For non-technical departments, it surfaces actionable insights and automates workflows. Last year, Gartner recognized Atlassian as an emerging leader specifically in generative AI technologies, cementing its position at the intersection of work management and AI innovation.

Atlassian’s third-quarter performance demonstrates this strength. Revenue increased 21% to $1.4 billion, while RPO jumped 42% to $3.3 billion. Non-GAAP earnings rose 35% to $1.04 per diluted share—notably faster than revenue growth. CEO Mike Cannon-Brookes highlighted that monthly active users engaging AI capabilities expanded 50% to 3.5 million, indicating rapid AI feature adoption.

Keith Weiss at Morgan Stanley recently set a $320 per share price target on Atlassian, implying 170% upside from the current $118 price. At 30 times forward earnings, Atlassian’s valuation appears considerably more reasonable than many software peers. The 63% decline from all-time highs has created an attractive entry point, particularly given the company’s demonstrated ability to upsell AI-powered capabilities across departments.

Investment Implications: Navigating the Bear Market Opportunity

The current software bear market presents a paradox. Market psychology focuses on disruption risks, yet the structural data—strong CIO spending intentions, market consolidation trends, rapid AI adoption metrics—tells a different story.

Datadog presents a more cautious case. While the company’s market position and innovation pipeline remain compelling, the 102% return scenario presupposes exceptional execution and valuation expansion. Conservative investors might reserve full conviction until entry multiples compress further.

Atlassian, by contrast, offers more compelling risk-reward dynamics. The company’s expanded addressable market, demonstrated AI traction, and reasonable valuation create conditions for substantial appreciation—though the 170% scenario requires consecutive quarters of exceptional results.

Both companies illustrate how established software leaders can harness artificial intelligence not as a competitive threat but as a catalyst for customer value creation. In a software bear market, that distinction may prove decisive for patient investors positioned ahead of market sentiment shifts.