Rising AI, Analytics Budgets Could Lift Microsoft, Snowflake, Datadog

A BofA survey indicates a slight deceleration in projected software spending growth for 2025 and 2026, down to 9.9% and 10.8% respectively, reflecting macro uncertainties impacting demand. Data analytics remains the top spending priority, benefiting companies like Microsoft, Snowflake, and Datadog, which are well-positioned in AI and cloud services. While front-office applications show lower spending expectations as firms evaluate AI integration, infrastructure and back-office software are leading areas for AI investment.

Analysis

A recent Bank of America software spending survey, disclosed by analyst Brad Sills, indicates a tempered outlook for software expenditure, with projected growth for 2025 revised downwards by 100 basis points to +9.9% and for 2026 by 40 basis points to +10.8% compared to the December survey. This moderation is attributed to macro uncertainties and changing policies clouding the demand environment, although channel feedback suggests healthy new software project pipelines support an improving backdrop into 2026. Data Analytics has reclaimed the top position as a spending priority, displacing Cloud Communications and Videoconferencing to second, while Security maintained its third position. Notably higher spending intentions were also observed for observability and financials/ERP solutions. Conversely, front-office applications such as CRM Sales, Marketing, and Support scored lower, potentially as firms evaluate AI priorities for related projects. The survey highlights Infrastructure and Back Office as the leading categories for AI investment, with Back Office showing the most significant increase in interest. Specific vendor mentions include Microsoft (MSFT), Snowflake (SNOW), and Datadog (DDOG) as well-positioned beneficiaries in Analytics, Security, and Public Cloud. For AI in infrastructure, Amazon AWS (AMZN), Microsoft, and Alphabet's Google (GOOG/GOOGL) were most frequently selected. Workday (WDAY) was prominent for back-office AI investments after LLMs, while Salesforce (CRM) registered high interest for front-office AI offerings, though firms are reportedly still in a discovery phase with evolving pricing models for agentic AI. Adobe (ADBE) is noted as the market leader for AI investments in desktop applications. The survey also revealed that hiring expectations for 2025 are down, and recession expectations remain fairly high. An unusual factor, 'DOGE', was cited as impacting spending plans more significantly than tariffs, contributing to a lower weighted average spending projection.

Key Decisions for Investors

• Investors should consider overweighting positions in companies strongly aligned with high-priority spending areas like Data Analytics, Security, Public Cloud, and AI in infrastructure or back-office applications, such as Microsoft (MSFT), Snowflake (SNOW), Datadog (DDOG), Amazon (AMZN), Alphabet (GOOGL), and Workday (WDAY), which are identified as key beneficiaries despite the broader cautious outlook.
• Exercise caution with companies heavily exposed to front-office application spending (e.g., CRM, HUBS), as these areas show moderated investment intent while firms assess AI integration; however, monitor developments in AI offerings from vendors like Salesforce (CRM) as evolving pricing models and technology could unlock future growth.
• Closely track macroeconomic indicators, future IT spending surveys, and company-specific guidance, given that current software spending caution is linked to macro uncertainty and recession fears, while underlying project demand signals potential resilience for 2026.
• Factor in the reported decline in 2025 hiring expectations and persistent recession concerns highlighted by the survey, which could broadly influence the pace and scale of enterprise software adoption cycles across various segments.