Software’s Great Rebound: Why Investors Are Betting Big on DDOG, ORCL, and MSFT

It’s been a whirlwind of a turnaround for the software sector. After enduring a bruising selloff earlier this year that left many questioning the industry's future, software stocks are staging a powerful comeback. The narrative has shifted dramatically: investors who once feared that artificial intelligence would cannibalize traditional software are now betting that AI will be the ultimate growth catalyst.

The numbers tell a compelling story. The iShares Expanded Tech-Software Sector ETF (IGV), which serves as a vital barometer for the industry, has surged nearly 42% from its low point in April. This is a massive swing, considering the ETF had plummeted by as much as 30% earlier in 2026. At that time, the market was gripped by the fear that AI would automate away the need for many traditional software functions. Today, that same ETF is down less than 2% for the year, showing just how quickly sentiment can flip when the potential for innovation outweighs the fear of disruption.

Mapping the Industry Instead of Destroying It

This recovery isn't just a random market bounce; it’s a fundamental reassessment of value. As Daniel Morgan, a portfolio manager at Synovus Trust in Atlanta, pointed out to Reuters, the disruption caused by AI is real, but it’s not fatal. Instead of destroying the industry, AI is effectively remapping it. We are seeing a new landscape emerge where the winners are those who can integrate AI to make their products indispensable.

However, this isn't a case of "a rising tide lifts all boats." The market is becoming much more selective. Investors are no longer throwing money at any company with a ".com" or a SaaS model. Instead, they are rewarding companies that have successfully woven AI into their core offerings and, perhaps more importantly, those that are evolving their pricing strategies.

The Shift to Usage-Based Pricing

One of the most significant changes we're seeing is the move away from traditional per-user subscription models. In an era where an AI agent can do the work of ten people, charging by employee headcount (the classic seat-based model) starts to lose its logic. Investors are now gravitating toward companies that charge based on actual usage or the value delivered by their AI tools. This shift ensures that as businesses deploy more AI to handle complex tasks, the software providers actually see a piece of that increased productivity.

Industry experts and portfolio managers are highlighting a specific group of companies that are leading this charge. Names like Datadog, Palo Alto Networks, Synopsys, Oracle, and Microsoft are frequently cited as the top plays for this new era. These companies aren't just surviving the AI wave; they are riding it.

Momentum from Earnings and the "Nvidia Effect"

The rally found its footing last week, fueled by a series of positive earnings reports. When Snowflake and MongoDB released upbeat forecasts, it acted as a shot in the arm for investor confidence. It proved that despite the macro economic noise, demand for high-end enterprise software remains robust.

Then came the "Nvidia effect." On Monday, during his keynote at the Computex conference in Taipei, Nvidia CEO Jensen Huang offered a ringing endorsement of the software sector. Addressing the elephant in the room—the fear that AI agents might replace software apps—Huang argued the exact opposite. He noted that because we are no longer limited by human headcount, these AI agents will actually use more tools and software than ever before. "This is actually an incredible time to be a software company," Huang told the audience. His bullish stance triggered another wave of buying, reinforcing the idea that AI creates new markets rather than just replacing old ones.

The Standout Performers: Security and Cloud

Among the individual stocks making waves, Datadog (DDOG) has been a clear standout. The company has seen massive demand for its monitoring and security tools, which are essential for the massive data centers powering AI. Jonathan Cofsky of Janus Henderson noted that Datadog’s usage-based pricing makes it a perfect fit for the AI era. The stock has nearly doubled this year, recently hitting record highs after the company bumped up its annual outlook.

In the cybersecurity space, Palo Alto Networks is another investor favorite. Despite some daily volatility, it reached a record high earlier this week and is up over 57% year-to-date. Doug Rogers at Eaton Vance believes that as threats become more complex thanks to AI, Palo Alto’s pricing power will only grow. The logic is simple: as the world becomes more dangerous, the value of the shield increases.

The Titans: Oracle and Microsoft

Even the established giants are getting a second look. Oracle, which had faced some skepticism earlier, has regained its luster. Marc Dizard from Huntington National Bank suggests that Oracle’s massive, deeply embedded customer base gives it a unique advantage as it figures out the best way to monetize AI. Meanwhile, Microsoft remains the gold standard for long-term AI bets. Even though it relies heavily on subscriptions, the growth of its Copilot assistant and the Azure cloud platform makes it a formidable force. As Tim Ghriskey of Ingalls & Snyder put it, Microsoft is more than a survivor—it’s a permanent fixture in the game.