Two AI-focused stocks predicted to surge by approximately 108% by 2025, as suggested by certain Wall Street analysts.
In 2024, the U.S. stock market had another impressive year, with the S&P 500 gaining 23%, the Dow Jones Industrial Average advancing 13%, and the Nasdaq Composite surging 29%. The excitement around artificial intelligence (AI) continued to be a significant investment theme, with analysts from Morgan Stanley predicting bullish scenarios for Datadog and Arm Holdings.
Sanjit Singh at Morgan Stanley set a bull-case target of $205 per share for Datadog, implying 45% upside from its current price of $141. Meanwhile, Lee Simpson at Morgan Stanley set a bull-case target of $300 per share for Arm Holdings, representing 108% upside from its current price of $144.
Let's delve into these two companies.
Datadog: 45% potential upside
Datadog provides observability software, with a platform that includes over two dozen products to help businesses monitor applications and infrastructure. By identifying and resolving performance issues, Datadog enables better collaboration between development and operations teams. Recently, Gartner ranked Datadog as a leader in observability and digital experience monitoring software, and the market is forecast to grow at 12% annually through 2027.
Last year, Datadog introduced LLM Observability, a software module that lets developers monitor generative AI applications and large language models. With hundreds of customers already using the product and AI-native clients accounting for 4 percentage points of revenue growth in the recent quarter, Datadog is well-positioned to meet the growing demand for AI.
While Datadog's growth prospects appear strong, its current valuation of 75 times adjusted earnings may seem expensive. Morgan Stanley's bull-case target is based on revenue growing at 28% annually through 2026, which implies earnings growth well above the consensus. Plausible? Possibly, considering Datadog's history of delivering earnings above consensus. But, given the current valuation, a 45% return in 2025 seems difficult to achieve. Nevertheless, long-term investors should view Datadog as an excellent company with solid growth prospects and look for opportunities to buy on dips.
Arm Holdings: 108% potential upside
Arm designs central processing unit (CPU) architectures and sells its instruction sets to other companies, which then build chips optimized for various use cases. Arm architecture holds a dominant market share in smartphones due to its superior power efficiency. However, this quality also makes it appealing for energy-intensive data center workloads like AI.
Arm gained six percentage points of cloud computing market share in the last two years, as its chips became more powerful. Today, ten of the largest hyperscalers in the world are building Arm-based chips for their data center servers, including tech giants like Amazon, Microsoft, and Alphabet. Arm's differentiating business models allow companies to outsource some R&D expenses while still maintaining flexibility to build custom processors.
Wall Street expects Arm's adjusted earnings to increase at 33% annually through fiscal 2027, but Morgan Stanley's bull-case target is based on even faster growth driven by AI server chips. While this growth is plausible, given Arm's strong recent quarterly performance, a return of more than 100% in 2025 appears challenging. However, Arm remains a compelling long-term investment given its unique business model, with more appealing buying opportunities expected in the future.
- In the financial forecasts for 2025, analysts at Morgan Stanley suggest a potential 45% increase in Datadog's share price, moving from its current $141 to $205.
- As AI continues to influence the investing world, observability becomes a crucial aspect, with companies like Datadog profiting from the supercharged demand for AI software solutions.
- Given the bullish scenarios projected by analysts, investing in Arm Holdings could yield a potential return of 108%, climbing from its current price of $144 to $300 by 2025.
- Monetizing AI demands top-notch observability, hence, finance experts anticipate that companies like Datadog, with strong observability software, will continue to see growing returns in the coming years.
