Wells Fargo Initiates Coverage on Software Sector, Emphasizing AI as Inflection Point

Wells Fargo Initiates Software Coverage, Highlights AI as Transformative Inflection Point

Wells Fargo has commenced coverage on 18 small and mid-cap software stocks, signaling a significant shift within the sector driven by artificial intelligence (AI). The firm’s analysts assert that AI represents a major inflection point, particularly through the advent of agentic coding, which automates and executes complex tasks across software codebases.

The Event in Detail: Agentic Coding and Sector Ratings

The bank's research underscores a belief that "Investors are missing just how good AI is now in software," highlighting that "agents now do the work for you." This "first AI SaaS breakthrough," introduced in February 2025, is described as "supercharging developer productivity."

Among the companies now under coverage, Wells Fargo issued an 'Overweight' rating for MongoDB (MDB), Snowflake, Datadog (DDOG), Dynatrace (DT), HubSpot, Monday.com, Atlassian (TEAM), Braze, Confluent (CFLT), Twilio, and Klaviyo. These companies are identified as having strong positioning to capitalize on AI-driven growth.

Elastic, GitLab, Freshworks, RingCentral, Zoom, and Five9 received an 'Equal Weight' rating. Conversely, ZoomInfo was initiated with an 'Underweight' rating.

Analysis of Market Reaction: Accelerating AI Adoption and Productivity Gains

Wells Fargo's analysis points to accelerating adoption rates of AI tools as a key driver for market sentiment. Downloads for LangChain, an AI framework, have surged to 78 million per month from 32 million per month at the start of 2025, marking a 140% increase. Concurrently, mentions of LangChain in job postings have tripled, indicating growing industry demand. MongoDB downloads on the platform have also seen a 400% increase this year.

Further evidence of rapid AI integration includes Claude Code, an AI coding tool, which recorded over 21 million downloads in August, a substantial rise from 650,000 in March. Operational examples underscore AI's impact: Rakuten reportedly reduced its time-to-market for new features by 79%, shortening the process from 24 days to just 5 days using AI. Zapier has utilized Claude to facilitate real-time design concept visualization.

The bank anticipates that infrastructure vendors such as MongoDB, Datadog, and Dynatrace will significantly benefit as AI-native startups expand their operations. Wells Fargo forecasts that "Interacting with AI agents will be a core daily workflow," leading to broader monetization across both infrastructure and SaaS applications.

Broader Context & Implications: AI's Dual Impact on Software Valuations

The firm's perspective suggests a potential market undervaluation of the current capabilities and future impact of agentic AI. While the shift presents immense opportunities for companies effectively leveraging AI, it also poses challenges for those less integrated.

"AI systems are growing in complexity given the need to process all kinds of data (unstructured vs structured vs semi-structured; real-time vs batch; operational vs analytical; etc), necessitating a stronger underlying data stack," noted Wells Fargo analysts led by Michael Turrin.

This paradigm shift has raised concerns for some established software companies. Firms like Salesforce, Adobe, and ServiceNow have seen their stock performance affected by investor anxieties regarding AI's potential to disrupt demand for their existing products. While these companies are actively integrating AI, the market remains cautious about the competitive landscape.

Risks associated with agentic AI include operational and execution risks, such as service disruptions and security breaches, as well as strategic and industry risks from heightened competition. Legal and regulatory risks, including privacy concerns, are also highlighted.

Expert Commentary: Key Overweight Picks and Their Catalysts

Wells Fargo provided specific insights into some of its 'Overweight' rated stocks:

• MongoDB (MDB): Initiated with an 'Overweight' rating and a $430 price target, MongoDB is positioned to benefit from the increasing adoption of its document-based database architecture by AI-native companies. The company reported Q2 2026 revenue of $591.4 million, a 24% year-over-year increase, with its Atlas platform contributing 74% of total revenue. Gross margins improved to 71% (GAAP) and 74% (non-GAAP), partly due to AI-related cost efficiencies.
• Atlassian (TEAM): Rated 'Overweight' with a $216.00 price target, Atlassian is viewed as an "orchestration center" for managing AI features and agents within enterprises. The company's acquisition of DX, an engineering intelligence platform, for approximately $1 billion, aims to measure AI's impact on engineering teams.
• Confluent (CFLT): Initiated with an 'Overweight' rating and a $24.00 price target, Confluent is seen as establishing "the standard for data streaming in an AI world." The company demonstrated 23% year-over-year revenue growth and a 74% gross profit margin.

Looking Ahead: The Continuing Evolution of AI in Software

The implications of this shift are far-reaching. The expectation that "Interacting with AI agents will be a core daily workflow" suggests a fundamental redefinition of software development and operational processes. Investors will closely monitor further evidence of AI-driven monetization across both infrastructure and SaaS applications. Upcoming earnings reports from major software players, including Salesforce, will be critical in assessing the tangible impact of AI adoption on revenue and demand trends. The competitive landscape, with potential for new entrants and disruption from advanced AI models, will also remain a key focus for the software sector.