The artificial intelligence (AI) revolution is in full swing, and it's showing no signs of slowing. Just last week, Nvidia CEO Jensen Huang described the demand for his company's new Blackwell data center chips as "insane," which implies tech companies are moving at full speed to develop the most advanced AI models.
That means AI software is likely to get better and better from here, which could significantly benefit cloud monitoring company Datadog (NASDAQ: DDOG) and AI cybersecurity giant CrowdStrike (NASDAQ: CRWD).
That presents an opportunity for investors who are willing to put money to work for the long term as the AI story unfolds. Here's why it might be a good idea to split $1,000 equally between those two stocks.
1. Datadog
Datadog's cloud observability platform was designed to help businesses transition into the digital age by monitoring their infrastructure around the clock to identify technical issues as early as possible. For example, an online retailer might not be aware that its website is down in one region of the world until it notices a drop in revenue, but with Datadog, that issue can be picked up and flagged before it impacts the customer experience.
Datadog is now using its experience to create AI products and services, which is the next frontier in the digital revolution. It launched an AI assistant called Bits AI last year, which integrates into the Datadog platform to help users automate more workflows. It can autonomously produce incident summaries, and it can be prompted to investigate the root cause of technical issues, which can save managers substantial amounts of time.
Plus, Datadog now offers an observability tool specifically for large language models (LLMs). LLMs sit at the foundation of every AI chatbot or software application, so their health is critical. Datadog's observability tool helps developers monitor LLM costs, troubleshoot errors, and even evaluate response quality so they know whether its outputs are accurate. It integrates seamlessly with OpenAI, Microsoft Azure, Amazon Bedrock, and Anthropic, so developers can set it up in seconds.
Datadog had 28,700 total business customers at the end of the second quarter of 2024 (ended June 30), and 2,500 of them were already using its AI products and services. The company generated $645 million in total revenue during the quarter, and it said 4% was specifically attributable to AI. That number doubled from 2% in the year-ago period.
According to McKinsey & Company, 72% of organizations around the world have adopted AI in at least one business function. That's going to make observability tools a critical part of the software stack in the future, in the same way many organizations can't live without cloud observability tools today.
Datadog stock is a great addition to any portfolio over the long term. It's currently trading at a price-to-sales (P/S) ratio of 19.3, which is elevated relative to other software stocks, but that's still 35% below its average P/S ratio of 29.8 going back to when the company came public in 2019. In other words, there is still plenty of scope for upside from here, especially for investors willing to hold the stock for several years.
2. CrowdStrike
CrowdStrike is a leader in AI-powered cybersecurity. The company is in recovery mode right now after it mistakenly released a corrupt software update to its customers on July 19, crashing over 8.5 million computers. Some of CrowdStrike's largest clients suffered a cumulative financial loss of over $5 billion, so there were concerns the company would lose a significant amount of business.
However, during CrowdStrike's conference call with investors for the fiscal 2025 second quarter (ended July 31), CEO George Kurtz said the incident would result in a delay to many future contracts, but the majority of them remain in the sales pipeline. In other words, the fallout doesn't appear to be as severe as investors feared, which is why CrowdStrike stock is only down 26% from its all-time high right now (after being down 44% at its low point).
The truth is, there are very few good alternatives to what CrowdStrike offers its corporate customers. It's a complete cybersecurity solution with 28 modules (products) that protect cloud networks, employee identities, endpoints, and more. It uses a very lightweight cloud-based architecture, so endpoints like computers and devices aren't bogged down with clunky security software. That also means it works seamlessly in the background with almost no input required from the employees using those devices.
But AI is the secret sauce behind CrowdStrike's effectiveness, powering its ability to autonomously hunt for threats and respond to incidents. The company's AI models are trained on over 2 trillion security events every single day, so they are constantly learning and improving. Plus, the new Charlotte AI virtual assistant cuts down the need for human input even further, because it can answer practically any question about an organization's security posture, and it even produces incident summaries, eliminating hours of manual investigative work.
During Q2, CrowdStrike said 65% of its customers were using at least five modules. Plus, the number of customers using eight modules or more soared by 66% year over year, and that's the point where spending really starts to climb. The company ended Q2 with a record $3.8 billion in annual recurring revenue, and management reiterated its goal to hit $10 billion within the next seven years. In other words, any effects from the July 19 incident are expected to be very short-lived.
An estimate by Cybersecurity Ventures suggests cybercrime will cause $10.5 trillion worth of damage worldwide next year, and that number will likely grow over time, which will force businesses to ramp up their spending on protection. Therefore, the discount in CrowdStrike stock from its all-time high presents a great opportunity for investors to take a long-term position.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, CrowdStrike, Datadog, Microsoft, and Nvidia. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
