Wells Fargo previews first-quarter earnings for US software sector By Investing.com

Wells Fargo's US software Q1 preview favors Datadog and HubSpot and expects modest beats (~3% for Datadog; ~2.5 percentage points for HubSpot) as key to maintaining growth narratives. The bank warns investor selectivity and heightened scrutiny of SaaS guide credibility, with AI-related data points set to drive reactions. Checks with Anthropic customers indicate aggressive, sometimes 'uncapped', AI spending and that AI investments are not crowding out other enterprise spend.

Analysis

AI-driven incremental spend tilts disproportionately toward software with usage-based pricing and deep telemetry hooks; those vendors capture per-unit revenue upside as token/compute-heavy workloads generate 2x–3x the observability and API calls of traditional apps over the first 6–18 months of adoption. A secondary beneficiary is hyperscaler infrastructure and cloud-cost-management tools — rising AI workloads transfer variable costs to the cloud, creating a wedge where observability vendors can grow revenue while cloud providers crystallize gross margins.

The next 30–90 days are binary: earnings prints and guide credibility will reprice growth multiple risk premia across the cohort. If companies produce concrete AI adoption metrics (customer spend buckets, API call growth, ingestion volumes) multiple expansion is swift; absent those datapoints, markets will punish expected durable growth and rotate to FR/Free-Cash-Flow names. Macro sensitivity remains non-trivial — a sustained move higher in rates or cloud compute pricing (e.g., GPU spot up >25%) can invert the narrative within quarters.

Tactically, asymmetric upside lies in names that monetize usage (metered telemetry, API billing) and show early customer ROI lift; downside sits with seat/licensing-heavy vendors and those with opaque AI adoption metrics that can’t translate proof-of-concept into ARR. Watch customer-level cohort economics (net dollar retention by AI vs non-AI cohorts) and cloud bill elasticity as the decisive 3–12 month read-throughs on durable monetization and margins.

Key Decisions for Investors

• Long DDOG (2–3% portfolio weight) via a 60–90 day call spread to capture post-earnings re-rate: buy a 45–delta call and sell a 65–delta call; target 30–50% upside if observability telemetry growth prints; max loss = premium (~100% of trade size).
• Buy HUBS on a pullback (scale in to 2% position if >8–10% intraday drop around print) with a stop at -12% from entry; target 25–40% total return over 6–12 months assuming modest guide raise and visible customer reacceleration.
• Pair trade (1:1 notional): long DDOG / short a seat-based legacy SaaS name (example: CRM) — size 1–2% net delta. Rationale: capture spread if usage-based vendors outgrow license models; unwind if NDR divergence compresses to <5ppt within two quarters.
• Event hedge: buy Feb–Mar out-of-the-money put protection on broad software proxy (e.g., XLK or a software ETF) sized to cap portfolio drawdown from a surprise guide-short cycle; cost acceptable given high event risk over next 60–90 days.