If you keep your finger on the pulse of the market, you probably know that most technology stocks – including most software stocks – are now at record highs. The rallies that got them there appear to have accelerated in recent weeks, putting them out of reach for most investors.
Not every software file, however. For various reasons, a handful of them are left behind, despite their obvious potential.
Don’t spend too much time thinking about it. Just take advantage of this temporary weakness by intervening before they “catch up” to their peers by going parabolic. Here you can see your best three bets of the moment.
1. Date dog
Chances are you’ve never heard of it Data hound (NASDAQ:DDOG). While its $40 billion market cap hardly qualifies it as small cap, that’s not exactly big either. It also doesn’t have a consumer-facing product that would familiarize the average individual investor with the company.
Don’t let the lack of size or profile fool you. Datadog has a lot of upside potential, and even more so considering the stock is still down 37% from its late 2021 high and has been largely stagnant since the start of this year.
In the simplest terms, Datadog offers observability products to companies that manage large networks of servers, apps, and cloud computing platforms. In other words, the software allows IT professionals to view and optimize the flow of digital data across a complex network of computers. Technology market research outfit Gartner rates the company’s observation software as one of the best this year, second only to second place Dynatrace in terms of completeness and implementation. Datadog’s platform is especially useful in cybersecurity, giving IT teams the ability to detect and respond to cyber threats in real time.
And the numbers speak for themselves. Revenue is on track to improve by nearly 24% year over year and grow another 22% next year. Next year’s revenue growth is also expected to fuel earnings growth, from this year’s expected earnings of $1.65 per share to $1.95 per share. Expect comparable sales and revenue growth through 2026 and very likely beyond.
This stock isn’t cheap – perhaps the reason it has struggled since 2022. However, this increasingly appears to be one of those cases where the company’s tax trajectory means more than the stock’s valuation.
2. HubSpot
At first glance, it seems unlikely that a customer relationship management (CRM) software company could successfully compete with the industry titan. Salesforce. It’s just too dominant.
The point is that the more features, options and services a provider offers in an attempt to appeal to more potential customers, the less focused, less attractive and more expensive that platform becomes. This opens the door to potential rivals willing and able to come up with something different, even if the only major difference is price.
That seems to be exactly what CRM outfit is HubSpot (NYSE: HUBS) has done. Although its founding in 2006 came well after Salesforce’s 1999 launch (plus a number of other CRM platforms in between), figures from market research firm HG Insights indicate that Hubspot has grown to a close second to Salesforce in market share, with only about 25% fewer paying customers.
Granted, Salesforce generates more revenue than HubSpot, which suggests the former serves larger enterprise customers and/or generates more revenue from them. Gartner even considers Salesforce to be the more complete platform. However, Gartner also says that HubSpot is the best CRM name in the world when it comes to its ability to do what it says it can do for its customers.
Of course, these rankings don’t necessarily mean much to investors. A stock’s potential is ultimately tied to the underlying company’s fiscal capacity to grow. HubSpot has had enough of that, even though its shares have underperformed since April. This year’s expected sales growth of almost 19% is in line with previous and expected growth. Profits are growing even faster.
3.Microsoft
Finally, add Microsoft (NASDAQ: MSFT) to your list of software stocks that could go parabolic in the near future.
It’s an oldie but a goodie. The stock has also been strangely underperforming since July, failing to reach the record highs that most of its fellow tech giants managed during this period.
You probably know the reason. While Microsoft seemed to have an edge in the early days of the artificial intelligence (AI) revolution, it now appears to be losing it. DA Davidson and Oppenheimer both recently downgraded the software giant’s shares due to these competitive concerns. As Davidson analyst Gil Luria clearly explains, “The competition has largely overtaken Microsoft in AI, which reduces the justification for the current premium valuation.”
And the concerns are valid, to be honest. The low-hanging fruit of the AI movement has all been picked and most of its key players have refined their offerings to near perfection. In the future, it will become significantly more difficult to remain competitive in the AI market.
However, these fears likely obscure some positive truths about Microsoft. Those are (1) AI isn’t even close to being this company’s sole source of revenue, and (2) if nothing else, Microsoft can still leverage its powerful brand name when pitching its products to consumers alike as companies.
It’s also worth adding that cloud computing remains a big part of Microsoft’s business. In this sense, data from research firm Synergy Research Group indicates that Microsoft’s cloud business is outgrowing all others, including Amazon‘S.
This cool software name’s revenues and revenues are also growing consistently in the mid-teens and are expected to continue growing for at least a few more years.
This might make the point: Even though Microsoft stock has been underperforming for a while, most analysts aren’t discouraged. More than three-quarters of them still view shares as a strong buy, and their consensus price target of $497.04 is almost 20% above the current share price.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. James Brumley has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Amazon, Datadog, HubSpot, Microsoft, and Salesforce. The Motley Fool recommends Gartner and recommends the following options: long calls in January 2026 for $395 at Microsoft and short calls in January 2026 for $405 at Microsoft. The Motley Fool has a disclosure policy.
3 Software Stocks That Could Go Parabolic was originally published by The Motley Fool
