The AI boom is entering a new phase, according to Wall Street analysts, with software companies and businesses adopting AI set to become the next major beneficiaries. Morgan Stanley believes the focus will shift from semiconductor and infrastructure companies to firms that use AI to reduce costs and improve efficiency.
Amazon is highlighted as a key player in this transition. The company is leveraging AI and robotics to make its retail operations more efficient, with investments in generative AI applications optimizing inventory management, last-mile delivery, and warehouse operations. Amazon's operating margin expanded by more than 3 percentage points in the last two years, reaching 12.1% in the most recent quarter. Morgan Stanley analysts expect this margin to hit 17% by 2028 as AI and robotics continue to drive efficiency gains.
Datadog is another stock well-positioned to benefit from the broadening AI trade. The company provides observability and digital experience monitoring software, with its platform integrating over two dozen performance-monitoring products. Datadog reported a 36% revenue increase in the second quarter, driven by strong demand from AI customers. Wall Street expects Datadog's adjusted earnings to grow at 19% annually through 2028, although the current valuation of 104 times adjusted earnings is considered expensive.
While Amazon's current valuation of 20 times earnings is seen as attractive, some analysts suggest that investors consider other top stocks identified by The Motley Fool Stock Advisor. The article also notes that Datadog's rich valuation makes it a risky investment, recommending a small position with a wait for a substantial pullback before building a larger position.