Barclays has adjusted its ratings for HubSpot (NYSE:HUBS) and Monday.com (NASDAQ:MNDY), downgrading both from Overweight to Equal Weight as these companies prepare to announce their third-quarter earnings. This decision reflects Barclays' anticipation that the upcoming earnings season will highlight significant distinctions among software companies, particularly as some firms begin to capitalize on AI-driven growth while others do not yet show such benefits.
Raimo Lenschow, an analyst at Barclays, anticipates a largely stable earnings period, with many companies expected to perform well and benefit from easier federal comparisons following previous reductions related to DOGE. ServiceNow (NYSE:NOW) is one company expected to gain from these conditions. Lenschow notes that AI-driven growth is becoming apparent in companies like DigitalOcean (NYSE:DOCN) and Datadog (NASDAQ:DDOG), while it remains elusive for HubSpot and Monday.com.
Lenschow has expressed optimism about Microsoft's (NASDAQ:MSFT) fiscal first-quarter results, forecasting that Azure will grow by approximately 40% and Office will see growth in the high teens, around 17% when adjusted for constant currency. This growth is attributed to the expansion of Copilot seats and the implementation of a new consumption pricing model introduced in July. However, Lenschow cautions that a new accounting structure might introduce some variability in the results.
During the quarter, DigitalOcean and CoreWeave increased their prices by approximately 30% and 25%, respectively, due to the ongoing high demand for AI infrastructure. Both companies also expanded their capacities significantly in the second quarter, with CoreWeave adding nearly 500 megawatts and DigitalOcean about 10 megawatts. Lenschow suggests that this expansion could lead to above-average revenue performance and improved guidance. He projects that CoreWeave's adjusted operating margin could rise from 5% to about 14%.
In the payroll software sector, Barclays maintains an Equal Weight rating for Paycom (NYSE:PAYC) and Paylocity (NASDAQ:PCTY), citing uncertainties in execution. However, there is potential for these companies to exceed expectations. Paylocity is projected to see only $1.3 million in quarter-over-quarter growth compared to a typical $9 million. Paycom is expected to benefit from an additional payroll cycle, which could add $15 million to $20 million. Both companies are also likely to gain from higher interest rates on float revenue.
Lenschow remains positive about the long-term AI prospects for HubSpot and Monday.com, though he believes the timeline for AI-driven growth may be longer than initially anticipated. He emphasizes the need for evidence that AI adoption can lead to sustained revenue growth before becoming more optimistic. For HubSpot, AI monetization is expected to become significant in the latter half of 2027, with net new annual recurring revenue (NNARR) projected to lag behind revenue growth this year. Deal cycles have also extended from four to six weeks to about five months.
At Monday.com, AI accounted for 17% of net new ARR in the second quarter but only about 1% of total ARR. Revenue growth is expected to slow to 16%-17% in the third quarter, down from 30% in early 2025. This indicates that while AI is contributing to new revenue streams, its overall impact on total revenue is still limited. The company faces challenges in accelerating its growth rate, which has been declining as AI adoption progresses.
Overall, the adjustments in ratings by Barclays reflect a cautious approach to the software sector, particularly in light of the varied pace of AI integration among companies. While some firms are beginning to see tangible benefits from AI, others are still in the early stages, and the timing of significant revenue impacts remains uncertain. As the sector continues to evolve, companies that can effectively leverage AI may gain a competitive edge, while those that lag may face challenges in maintaining growth momentum.
Footnotes:
- Barclays downgraded HubSpot and Monday.com ahead of their Q3 earnings. Source.
- Microsoft's Azure and Office are expected to see significant growth. Source.
- DigitalOcean and CoreWeave raised prices due to AI infrastructure demand. Source.
- Paycom and Paylocity maintain Equal Weight ratings due to execution uncertainties. Source.
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