The A.I. play you haven't heard of yet

Published Fri, May 19 202311:00 AM EDTUpdated Fri, May 19 202311:30 AM EDT

This under-the-radar software stock could be the next big artificial intelligence winner investors are ignoring, according to some Wall Street analysts. Dynatrace , a Massachusetts-based software company that harnesses artificial intelligence for a host of use cases, including business analytics and application security, could win big in the latest AI arms race. Shares have gained more than 28% so far in 2023. DT YTD mountain Dynatrace shares in 2023 BMO Capital Markets' Keith Bachman called the stock a "clear leader" within AI in a Wednesday note to clients. He views compelling growth and margin opportunities for Dynatrace through its Grail analytics tool that uses AI to help users better understand their data. This offering, he said, may also help improve customer stickiness. Transitioning customer platform subscriptions to longer contract agreements should also benefit annual recurring revenue growth and support retention rates, he added. Given his conviction in Dynatrace's AI potential, Bachman raised his price target to $55 from $50 a share reflecting about 12% upside from Thursday's close. Bachman isn't alone in his attitude toward Dynatrace. BTIG's Gray Powell cited similar trends in his upgrade of Dynatrace to a buy rating on the heels of its fiscal fourth-quarter print, citing upside potential and a solid outlook for 2024. Powell viewed the results as a sign of stabilizing growth even in a difficult economic backdrop, and called commentary on new products like applications security and log monitoring "encouraging." "Looking forward, we think guidance for FY24 is conservative and believe that an upside bias to estimates now exists after a period of uncertainty that started back in early 2022," he wrote. Powell also expects Dynatrace to benefit from greater cloud adoption and the push by companies to transform and improve efficiency for customers. "While our recent fieldwork leads us to believe that a weakening economy is putting increased pressure on IT budgets and broader observability initiatives, DT's execution in recent quarters has shown a stabilization in trends," he wrote. "Plus, new products like Application Security and Log Monitoring represent material expansion opportunities." — CNBC's Michael Bloom contributed reporting