Software stocks have rarely seen such divergent performances. Here's how to pick winners.

By Hannah Pedone

An Evercore analyst notes that infrastructure software stocks have vastly outperformed application names. But there's still hope for companies like Salesforce.

Shares of Datadog have risen 94.2% so far this year.

It's not all doom and gloom in the software sector, as some high-profile stocks have posted standout gains this year while their peers languish.

Evercore ISI analyst Kirk Materne believes the divergent performances relate to how various companies are looking to monetize artificial intelligence.

"The market has, in effect, stopped pricing software as a single asset class," he wrote in a Monday note, saying that investor capital has been concentrated in the direct AI beneficiaries - notably those "levered to AI consumption and the buildout of data infrastructure" - while the rest continue to face durability risks associated with the narrative that AI threatens their business models.

Materne wrote that "scaffolding names" like Datadog (DDOG), Palo Alto Networks (PANW) and Crowdstrike Holdings (CRWD) dominate as the winners. He was referring to the "AI scaffolding" layer, or "the infrastructure, security, observability, data and orchestration platforms that enterprises need in order to deploy AI safely and at scale."

"The reality is we see little reason for investors to move away from infra[structure]/security as a safe port in the AI storm right now," he said.

The software sector has "cleanly" split in two, Materne added, and a widening gap in how investors view the terminal value of different companies has created "one of the widest intrasector performance spreads on record."

Shares of Datadog, Palo Alto Networks and CrowdStrike are up 94.4%, 99.6% and 80.2% so far this year, respectively.

Other winners include Cloudflare (NET) and Cadence Design Systems (CDNS), up 26.4% and 21.2%, respectively, so far this year.

Meanwhile, shares of application software companies, like productivity tools that perform specific tasks for users, and vertical software companies, whose platforms are tied to an industry's workflow, have been some of the biggest losers in terms of their year-to-date performance. Materne noted Salesforce (CRM), Adobe (ADBE), Workday (WDAY) and Atlassian (TEAM) - down 34.4%, 34.7%, 34.5% and 45.4%, respectively, so far this year.

There are a number of reasons why the winners have been thriving. Monness, Crespi, Hardt & Co. analyst Brian White wrote in a recent note that Datadog has positioned itself well to benefit from the growing IT complexities that come with generative AI. The company has "proven it's possible to participate in the long-term, AI trend without resorting to financially destructive behavior," he said - noting Datadog has taken a "disciplined" approach to AI when compared to a cohort of tech companies resorting to "colossal capex spending" and deteriorating balance sheets to win.

Meanwhile, Palo Alto Networks and CrowdStrike shares have been strong performers as investors buy into the narrative that security is more important than ever in the AI era. Jefferies analyst Joseph Gallo noted in a note last month that Palo Alto Networks has very strong visibility into its sales cycle for the next nine months as it has captured demand for traditional network security, cloud security as well as endpoint offerings.

According to an index of software names analyzed by Evercore ISI Research, shares of infrastructure software companies are up 51% over the past year, while application software companies have been down 40% and vertical software stocks are down 27%.

But it's not too late for other software stocks to fall back into Wall Street's good graces. Materne named Snowflake (SNOW), Samsara (IOT), Microsoft (MSFT), Oracle (ORCL) and Salesforce as his top five picks for the second half of 2026 - admittedly with some nuances.

For example, Microsoft and Salesforce have the potential to show acceleration in the second half of the year, though "any momentum in these names is unlikely to build until after July/August earnings."

-Hannah Pedone

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