Where you want to invest in tech for the second half, according to one top analyst

§ 01 Executive Snapshot

• What: Analyst Heath Terry highlights the data layer as a key investment area for AI growth in the second half of 2026.
• Who: Heath Terry, Citigroup's head of AI investment research, and companies like Snowflake, MongoDB, Datadog, and Elastic.
• Why it matters: The demand for data-driven AI applications is reshaping the software sector, indicating a potential recovery following earlier devaluation.

§ 02 Key Developments

• Snowflake reported 33% annual revenue growth and trades at 112 times earnings for the next 12 months, with an enterprise value of more than 14 times sales.
• Datadog achieved 25% annual revenue growth, with a forward price-to-earnings multiple of 98 and an EV-to-sales multiple of about 19.
• The current phase of AI development emphasizes 'agentic' software components, leading to innovations in chip design and application orchestration.

§ 03 Strategic Context

• The software sector faced significant devaluation earlier this year, referred to as 'SaaS-mageddon', but is now showing signs of recovery with a focus on consumption-driven business models.
• The competitive landscape for AI applications is intensifying, with established players like OpenAI and emerging open-source models vying for market share.

§ 04 Strategic Implications

• Immediate market consequences include a renewed investor confidence in the software sector as companies begin to emerge as winners based on their exposure to data consumption.
• Long-term implications suggest that companies delivering efficient data management and orchestration solutions will play critical roles in AI adoption and implementation.

§ 05 Risks & Constraints

• Potential regulatory and cost-related risks may emerge as companies reassess their AI computing power usage, particularly in light of token-based metrics.
• Competition from open-source AI models could pressure established firms, affecting market dynamics and pricing strategies.

§ 06 Watchlist / Forward Signals

• Upcoming public offerings from frontier AI models like Anthropic and OpenAI will serve as key indicators of market sentiment and investment viability.
• Monitoring revenue growth and valuation metrics of data layer companies will provide insights into overall sector health and investment opportunities.