Investing.com -- Dynatrace shares could be poised for a re-rating as improving demand for observability software and emerging artificial intelligence-related spending drive faster growth than investors currently expect.

UBS has initiated coverage of the company with a Buy rating and a $60 price target.

The brokerage said its discussions with more than 10 customers, partners and industry experts pointed to a healthy demand backdrop supported by strong application performance monitoring (APM) demand, growing adoption of log-management tools and early AI-related tailwinds. UBS expects Dynatrace's annual recurring revenue (ARR) growth to accelerate to 16%, 17% and 18% in fiscal 2027-2029, compared with Wall Street forecasts for a slowdown to 16%, 14% and 13%, respectively.

UBS said enterprise customers continue to increase spending on observability tools as IT environments become more complex, while partners reported practice growth accelerating to 18%-21% in recent quarters and expected demand to remain stable or improve through year-end. The firm also noted that observability software is increasingly being prioritized within corporate IT budgets.

The brokerage expects AI to become a meaningful growth driver over time, though the impact remains modest today because most enterprises are still in the early stages of deploying AI applications at scale. UBS estimates AI-related demand could increase Dynatrace spending by 10% to 20% over the next two to three years, adding roughly three to five percentage points to growth, with most of the benefit likely arriving from fiscal 2028 onward.

Customers highlighted growing demand for monitoring large language models, AI agents and increasingly complex software environments created by AI coding tools. UBS said Dynatrace's Davis AI platform, which automates root-cause analysis and anomaly detection, was frequently cited as a competitive advantage.

The bank also downplayed concerns that advances in generative AI could make observability platforms obsolete. Customer and partner checks suggested that Dynatrace's deep integration into enterprise infrastructure, deterministic root-cause analysis capabilities and high switching costs create a significant competitive moat. UBS said it found little evidence that customers were considering replacing the platform despite growing AI adoption.

At current levels, UBS argued the stock's valuation does not fully reflect the potential for accelerating growth or future AI-driven demand, noting that Dynatrace trades at a discount to peers despite similar mid-teens growth prospects.