Buy these software stocks as the industry’s ‘roller coaster ride’ nears a bottom, Bernstein says

The “roller coaster ride” for cloud stocks is nearing its end, potentially opening a buying opportunity for investors, according to Bernstein. “While the ride can be stomach churning, we initiate coverage today remembering that even the scariest roller coasters pull up, if they are well-built,” wrote analyst Peter Weed in a note to clients Tuesday. “Cloud SaaS’ wild ride appears to be nearer to a bottom relative to historical markers, including evidence of strong fundamentals vs. investors’ desire: a growing cash engine.” Weed initiated coverage of Datadog , ServiceNow and Atlassian with outperform ratings, noting that all three stocks are underappreciated by analysts on Wall Street. “NOW and TEAM (Outperform) are ‘value’ stories in our growth sector – long-term strong track records that we anticipate will continue, each with one performance aspect underappreciated by the street,” Weed said. Shares of ServiceNow and Atlassian have plunged about 33% and 50% this year, respectively, but substantial growth could come for both stocks. Weed stuck a $646 price target on ServiceNow, which implies a potential 48% return from Tuesday’s close. Given a $257 price target, Atlassian’s stock could rally another 34%. Weed named Datadog the firm’s top pick in the sector given its strong CAGR, pre-pandemic growth rates and growing total addressable market. He expects revenue to expand as the company launches projects inhibited by Covid-19 and customers grow as the shift to IT cloud gains steam. “While we recognize that it is a hefty valuation to digest, we remind investors that Datadog has been one of the most exciting public-market growth stories since its IPO,” he wrote. “Even facing COVID growth headwinds, it remained one of the fastest growing public SaaS vendors with 50% YoY revenue growth at > $500M revenue.” Shares of Datadog have plummeted nearly 48% this year, but Weed sees some upside ahead. He placed a $172 price target on the stock, which implies a potential 85% rally from Tuesday’s close. Cloud stocks soared at the onslaught of the pandemic, becoming some of the best-performing names as the market rebounded from its initial Covid sell-off and climbed to record levels during the following year. However, rising rates, along with growth concerns in the space, have led to steep losses for companies in the sector. — CNBC’s Michael Bloom contributed reporting