Written by Cassian Vance
For the past year, the artificial intelligence investment narrative has been overwhelmingly dominated by hardware. Semiconductor designers, foundry operators, and server manufacturers have captured the lion’s share of capital inflows. Meanwhile, the software sector has languished under a cloud of skepticism, with investors questioning when—or if—enterprise software companies could successfully monetize AI without destroying their margins.
On May 7, 2026, Datadog (DDOG) provided a definitive answer, sparking a massive rally that proves AI software winners are finally emerging.
Datadog’s Billion-Dollar Milestone
Datadog’s first-quarter earnings report was nothing short of a watershed moment for the cloud monitoring and analytics sector. The company surged 31% in a single trading session, closing near $186 after delivering what analysts at TD Securities characterized as an “eye-popping print” and a “must-own stock” [1].
The headline numbers were exceptional: Datadog’s quarterly revenue topped $1 billion for the first time, growing 32% year-over-year to $1.006 billion. The company delivered adjusted earnings of $0.60 per share, crushing the consensus estimate of $0.50 to $0.52 [2]. More importantly, management raised its full-year guidance, signaling that the acceleration is structural rather than anomalous.
However, the true catalyst for the 31% stock surge was the qualitative commentary regarding artificial intelligence. Datadog provides the critical cloud infrastructure monitoring that allows complex AI models—including those from OpenAI and Anthropic—to function reliably. During the earnings call, CEO Olivier Pomel revealed that the company had landed two major hyperscaler customers specifically for training operations in their superintelligence labs [1].
Thesis on DDOG: BUY
Datadog has successfully transitioned from a passive beneficiary of cloud migration to an active enabler of the AI supercycle. The fear that AI would compress software margins has been invalidated here; Datadog generated $335 million in operating cash flow and $289 million in free cash flow, representing a massive 29% free cash flow margin [3]. The stock’s breakout validates the thesis that AI customers are driving more infrastructure spend, not less. Even after the 31% surge, Datadog remains a core holding for any portfolio seeking exposure to the software layer of the AI buildout.
The Twilio Transformation
Datadog was not the only software company proving the AI monetization case this week. Twilio (TWLO), the customer engagement platform, has quietly orchestrated a massive turnaround, with its stock surging approximately 50% over the past month [1].
The momentum culminated during Twilio’s annual investor day on May 7, where the company unveiled powerful new platform capabilities designed to help AI agents communicate and collaborate. These enhancements allow AI systems to log customer data, facilitate seamless handoffs to human operators, and generate actionable data lists in real-time.
Twilio CEO Khozema Shipchandler succinctly articulated the value proposition: “We’re not just lowering their costs, not just serving more consumers, but actually increasing the revenue footprint” [1]. This is the holy grail of enterprise software: moving from a cost-center efficiency tool to a revenue-generating engine.
Thesis on TWLO: BUY
Wall Street is aggressively repricing Twilio’s transformation. Following its Q1 earnings report—which featured the highest revenue growth in over three years, including a 20% year-over-year jump in voice revenue—analysts flooded the stock with price target hikes. Rosenblatt Securities raised its target to $230, while BTIG and TD Cowen hiked to $215 and $210, respectively [4] [5]. Twilio is successfully deploying AI-native solutions that directly improve the customer experience, making it a premier play on the deployment phase of the AI cycle.
The Fastly Warning Sign
While Datadog and Twilio demonstrate the upside of the software sector, Fastly (FSLY) serves as a brutal reminder of the market’s unforgiving nature when growth expectations are missed.
On the same day Datadog soared, Fastly shares plunged 38.23% to close at $19.50 [6]. The irony is that Fastly actually delivered record Q1 results, grew total sales by 20%, and achieved profitability on an adjusted EPS basis. The company even raised its 2026 sales growth guidance to 15% [6].
So why the massive sell-off? The market ruthlessly punished the deceleration in Fastly’s core Network Services segment, which grew by only 11%. While its newer Security and Compute units are growing rapidly (67% and 47%, respectively), they only account for roughly one-fourth of total sales [6].
Thesis on FSLY: SELL
Prior to the earnings report, Fastly was trading at a staggering 71 times forward earnings after its stock had tripled over the previous year. At that valuation, any hint of deceleration in the core business triggers a violent multiple compression. Furthermore, management indicated that infrastructure capital expenditures as a percentage of revenue will more than double in 2026 [6]. Fastly is facing the exact margin compression fears that Datadog just successfully refuted. Investors should avoid catching this falling knife until the core business stabilizes and the capex cycle peaks.
Strategic Implications
The May 7 trading session marks a critical bifurcation in the software sector. The market is no longer rewarding companies simply for existing in the cloud ecosystem. Capital is aggressively rotating toward software platforms that can explicitly demonstrate how artificial intelligence is accelerating their top-line growth and expanding their margins.
Datadog and Twilio have proven that the AI software thesis is viable and highly lucrative. Investors should actively rotate out of high-multiple software companies with decelerating core businesses (like Fastly) and consolidate their capital into the proven AI infrastructure winners.
Disclaimer: This article is for informational purposes only and does not constitute investment advice. The opinions expressed are those of the author and do not reflect the views of Equities Orbis or its affiliates. Always conduct your own research and consult a licensed financial advisor before making investment decisions.
