BofA is bullish on 2Q infrastructure software benefiting from AI, with top picks DDOG, SNOW, FROG, MDB, and DT

Overview

This is a BofA preview report for the 2Q earnings season of US infrastructure software companies. The core view is that AI-driven demand is flowing first to infrastructure software vendors, especially companies related to observability, data cloud, databases, and software supply chain. The report names Datadog, Snowflake, JFrog, MongoDB, and Dynatrace as top picks, while warning that C3.ai and PagerDuty face higher downside revision risk.

Core views

The core views include: first, infrastructure software is more likely than application software, vertical software, and cybersecurity to show AI benefits in 2Q; second, DDOG, SNOW, and FROG have conditions for acceleration in revenue or cloud revenue growth metrics; third, MDB needs to validate its AI beneficiary thesis through Atlas growth and AI ecosystem embedment; fourth, DT's usage growth may gradually be reflected in subscription revenue; fifth, the sector's year-to-date performance still lags the NASDAQ, but valuations have expanded from the lows, and further re-rating will require support from actual delivered growth.

Analysis framework

The report uses a top-down plus stock-specific approach based on industry research, demand signals, key company operating metrics, differences between BofA and market consensus expectations, target price valuation multiples, and earnings catalysts. The focus is not simply on whether revenue beats expectations, but on evaluating the magnitude of growth acceleration, whether AI-related demand can convert into usage and bookings, and whether management guidance reinforces the medium-term growth narrative.

Methodology notes

• Industry cycle and earnings preview2Q earnings preview

  Build a stock-specific analytical framework around key indicators and catalysts ahead of earnings releases.

  The report identifies the most important 2Q or fiscal-quarter metrics for each company, such as total revenue, product revenue, cloud revenue, Atlas revenue, ARR, NNARR, and subscription revenue, and assesses whether the magnitude of upside surprise is sufficient to drive the stock price.

• Valuation methodsEV/CY27E revenue and EV/CY27E free cash flow multiple

  Set target prices using forward revenue or free cash flow multiples.

  The report compares company valuations against the infrastructure software peer group at 5.5x EV/CY27E revenue and relevant FCF multiples, and assigns premiums or discounts based on growth rate, free cash flow margin, competitive position, and execution risk.

• AI theme validationAI-driven usage and bookings signal

  Validate whether AI demand is materializing through usage, bookings, cloud revenue, and database growth.

  The report emphasizes that AI benefits should not remain only at the narrative level, but should be reflected in DDOG total revenue, SNOW product revenue, FROG cloud revenue, MDB Atlas growth, and DT subscription revenue.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• DDOG

  Top pick; beneficiary of observability and AI infrastructure demand

  Strengths

  Total revenue growth is likely to accelerate, the AI beneficiary narrative is clear, growth scarcity is strong, and free cash flow margin is higher than peers.

  Weaknesses

  Valuation is significantly above infrastructure software peers, and the market may require a larger revenue beat for a highly valued company.

  Comparison

  The report uses a 20.6x EV/CY27E revenue valuation, well above the 5.5x peer level, because both CY27 revenue growth and FCF margin are higher than peers.

  Risks

  If the magnitude of the 2Q revenue beat falls short of what the market expects for a high-valuation company, the stock may come under pressure.

• SNOW

  Top pick; beneficiary of the data cloud and AI software market

  Strengths

  Strong product revenue growth, rising demand for AI products, and management previously raised full-year product revenue growth guidance.

  Weaknesses

  The stock has already risen sharply after 1Q, and the market already has high expectations for accelerating growth.

  Comparison

  The report assigns a 16.2x EV/CY27E revenue valuation, above the 5.5x peer level, based on expectations of 25% CY27 revenue growth and a 25% FCF margin.

  Risks

  If product revenue growth does not exceed expectations by enough, the stock may pull back in the short term, though the report believes dips may be bought quickly.

• FROG

  Top pick; beneficiary of Cloud revenue and software supply chain security demand

  Strengths

  High Cloud revenue growth; if 2Q incremental Cloud revenue matches 1Q, it would produce growth acceleration; it has scarce AI beneficiary attributes within SMID software.

  Weaknesses

  Valuation is above peers, and it needs to keep proving Cloud growth can be sustained.

  Comparison

  The report's target price is based on 16.8x EV/CY27E revenue, significantly above the 5.5x peer multiple.

  Risks

  If Cloud revenue growth slows, it may trigger short-term volatility.

• MDB

  Top pick; potential beneficiary of databases and the AI application ecosystem

  Strengths

  If Atlas growth exceeds expectations and the AI catalyst timeline moves forward, market narrative could improve significantly.

  Weaknesses

  Previously, the market was still divided on whether Atlas growth was strong enough to be a catalyst.

  Comparison

  The report maintains Buy and a $450 target price, implying relatively high upside among the top picks.

  Risks

  If Atlas growth is not clearly above guidance, or if management still describes AI contribution timing as 12 to 18 months away, stock catalysts may be insufficient.

• DT

  Top pick; beneficiary of enterprise observability demand

  Strengths

  Platform usage has already achieved more than 20% YoY growth, subscription revenue and ARR growth may accelerate, and rising enterprise digitalization and AI complexity support demand.

  Weaknesses

  Revenue recognition is relatively delayed, so it takes time for usage growth to flow through to financial metrics.

  Comparison

  The report's target price is based on 24.8x EV/CY27E FCF, translating to about 5.9x EV/CY27E revenue, slightly above the 5.5x peer level.

  Risks

  If NNARR or subscription revenue does not show acceleration, the growth delivery narrative may be delayed.

• PD

  Negative-risk name; growth cadence and guidance recovery still need validation

  Strengths

  If it resumes raising revenue guidance and restores a sustainable beat-and-raise cadence, market sentiment may improve.

  Weaknesses

  The FY27 revenue guidance midpoint is close to flat, growth is significantly below peers, and the market has higher expectations for execution improvement after the new CFO took office.

  Comparison

  The report maintains Underperform with an $8 target price, assigning a discount versus peers due to low growth.

  Risks

  If it once again fails to raise revenue guidance, it may trigger stock downside.

• C3.ai

  Negative-risk name; high transformation and execution risk

  Strengths

  If F1Q revenue significantly beats expectations and FY27 guidance is raised, sentiment may improve.

  Weaknesses

  After CEO changes, layoffs, and business adjustments, the report believes multiple quarters of stable beat-and-raise are needed to rebuild a positive narrative.

  Comparison

  The report maintains Underperform, believing its expected FY27 revenue decline is significantly weaker than the average growth of infrastructure software peers.

  Risks

  Execution risks from management, sales execution, and cost structure adjustments may lead to downward expectation revisions.

Key data

• Year-to-date performance of the infrastructure software sector-6.0% YTDCompared with NASDAQ at +9.2%, the sector has recovered from its roughly -30% low for the year.
• Infrastructure software peer valuation5.5x EV/CY27E revenueThe report uses this as the valuation multiple reference for target prices of multiple companies.
• DDOG target price$305Raised from $280, Buy reiterated, implying about 20% upside.
• SNOW target price$330Raised from $300, Buy reiterated, implying about 21% upside.
• FROG target price$105Raised from $100, Buy reiterated, implying about 21% upside.
• DT target price$55Raised from $50, Buy reiterated, implying about 28% upside.
• MDB target price$450Buy maintained, implying about 46% upside.
• PD target price$8Raised from $7 but Underperform maintained, implying about 15% downside.
• DDOG key metricIf 2Q revenue is 3% above the midpoint of guidance, YoY growth would be about 33.9%This would further accelerate from 32.2% growth in the previous quarter.
• SNOW key metricIf product revenue is 3% above the midpoint of guidance, YoY growth would be about 33.9%This would be close to 1Q growth on a higher comparison base.
• FROG key metricIf 2Q incremental Cloud revenue matches 1Q, Cloud revenue YoY would be about 53.4%Above 1Q's 50% growth.
• MDB key metric2Q Atlas growth of at least about 28%, 3Q Atlas guidance of at least about 26%The report views this as the key threshold for validating the AI beneficiary story.
• DT key metricCC subscription revenue growth needs to accelerate from about 16% YoYThe report believes this could become a stock catalyst.

Impact & implications

If the report's view plays out, the investment focus in infrastructure software will shift from pure AI narrative to verifiable growth in usage, revenue, and bookings, and companies with evidence of growth acceleration and AI demand conversion may receive valuation premiums. By contrast, companies with unstable growth cadence or unfinished management or sales transformation may face guidance and market expectation cuts.

Risks

• If AI demand fails to convert into revenue, usage, bookings, or guidance increases, the sector's valuation expansion may be difficult to sustain.
• If high-valuation companies such as DDOG, SNOW, and FROG do not beat expectations by enough, they may face short-term pressure due to overly high market expectations.
• Management, sales, pricing, or growth model transitions at C3.ai and PagerDuty may bring downside revision risk.
• The infrastructure software sector has already seen valuation recovery from the lows; if fundamentals are not revised up in tandem, multiple compression risk remains.
• If the timeline for companies to disclose AI benefits is later than investors expect, especially for MDB, short-term catalysts may weaken.

What to watch

• Whether DDOG 2Q total revenue growth continues to accelerate from 1Q, and whether the magnitude of the beat is enough to support its high valuation.
• The degree to which SNOW product revenue growth exceeds guidance and whether full-year product revenue growth guidance is raised again.
• Whether FROG Cloud revenue maintains growth above 50% and continues to accelerate.
• MDB Atlas revenue growth, 3Q Atlas guidance, and management's commentary on the timeline of AI contribution.
• Whether DT constant-currency subscription revenue, NNARR, and ARR growth show that usage is flowing through to financial metrics.
• Whether PD restores a predictable revenue beat-and-raise cadence.
• Whether C3.ai can provide sufficiently strong evidence of transformation progress in revenue and FY27 guidance.