2 infrastructure software stocks to buy in 2026: Piper Sandler

Piper Sandler says it has the most confidence in Datadog and Varonis Systems heading into earnings, citing stable demand, strong U.S. security spending, and de-risked setups for both names. The firm expects Datadog to beat and raise on usage trends and its new Experiments product, while Varonis is seen as positioned for a Q1 beat and a likely full-year guidance raise. The note is supportive for both stocks, but it is analyst commentary rather than a company-reported event.

Analysis

The key read-through is not just that demand is stable, but that security budgets are proving more durable than broader software spend even as AI reshuffles allocation. That creates a relative-strength setup for vendors with clear security attach rates and expanding platform scope, while horizontal software names without a security wedge may see slower renewal momentum into 2026. The second-order effect is competitive: smaller point solutions are more exposed to consolidation pressure as buyers prefer fewer vendors that can justify spend with AI-enabled workflow uplift.

DDOG looks better positioned than the market may be pricing because usage-led models tend to reaccelerate faster once consumption trends inflect, and product expansion can extend the runway without requiring a major budget-cycle reset. The market still tends to treat observability as discretionary, but if enterprises are preserving cloud reliability spend while trimming lower-priority software, DDOG gains share by being tied to uptime risk rather than experimentation. VRNS has a different profile: the setup is less about category acceleration and more about estimate discipline, which tends to matter disproportionately when management has room to raise after a conservative setup.

The contrarian risk is that AI-driven spend reallocation is not a one-quarter story; if hyperscalers and infrastructure software keep absorbing IT dollars, “stable” may still mean slower net growth for the next 2-3 quarters. Another risk is that channel checks can miss deal elongation in mid-market security, where buyers are willing to pilot but slower to expand. That makes the near-term catalyst window tight: a beat is likely, but the real test is whether guidance revisions can keep up once budget season turns more competitive in the spring.

Key Decisions for Investors

• Go long DDOG into earnings with a 4-8 week horizon; risk/reward favors a beat-and-raise if usage trends hold, but size modestly because the multiple already reflects quality.
• Initiate a long VRNS position or call spread into the print; the best asymmetric setup is a guide-up after conservative 2026 assumptions, with upside driven by estimate revisions rather than multiple expansion.
• Pair trade: long DDOG / short a lower-quality horizontal SaaS basket over the next 1-2 quarters; the thesis is that security-adjacent spend remains protected while discretionary software elongates sales cycles.
• If owning DDOG, hedge with short-dated downside puts around earnings; implied vol should be favorable versus a setup where the primary risk is guidance conservatism, not demand collapse.
• Avoid chasing non-security software rallies until next budget cycle clarity; the second-order winner is capital concentration in security, not a broad software recovery.