Wall Street analysts are overwhelmingly bullish on Microsoft and Datadog.
Generative artificial intelligence (AI) relies on large language models and other machine learning models to create media content such as images, text and videos. The technology had its big bang moment when OpenAI introduced ChatGPT in November 2022, and demand for such products is expected to rise.
Bloomberg Intelligence estimates that spending on generative AI software will increase 2,790% to nearly $320 billion by 2032, representing an annual growth rate of 52%. That presents investors with a significant opportunity, one that could rival those created by the Internet in the 1990s.
Microsoft (MSFT -0.68%) And Data hound (DOG -4.11%) are well positioned to benefit from growing demand for generative AI software, and both stocks are highly valued by Wall Street:
- Of the 57 analysts who follow Microsoft, 91% rate the stock as a buy. The average price target of $500 per share implies an upside of 18% from the current share price of $425.
- Of the 44 analysts following Datadog, 88% rate the stock as a buy. The average price target of $150 per share implies an upside of 18% from the current share price of $127.
Here’s what investors need to know about Microsoft and Datadog.
1.Microsoft
Microsoft is the largest commercial software company in the world thanks to its strong business productivity (Office), enterprise resource planning (Dynamics), and several cybersecurity verticals. The company is tapping into that power with generative AI copilots, and early results are encouraging. Nearly 70% of Fortune 500 companies already use Microsoft 365 Copilot, which automates tasks in applications such as Word and Excel.
In addition to software, Microsoft also operates the second largest public cloud in the world. Azure accounted for 20% of cloud infrastructure and platform services last quarter, down 3 percentage points from the previous year. From a recent CIO survey by Morgan Stanley showed that Microsoft is the vendor most likely to gain market share over the next three years, thanks in large part to the strength in AI that comes from its partnership with OpenAI.
Microsoft reported solid financial results in the first quarter of fiscal 2025 ending September 2024, beating expectations on the top and bottom lines. Revenue rose 16% to $65.6 billion thanks to particularly strong revenue growth in advertising and cloud services. Meanwhile, net income under generally accepted accounting principles (GAAP) rose 10% to $3.30 per diluted share. Importantly, the recent Activision acquisition added 3 percentage points to revenue growth and subtracted 2 points from earnings growth.
During the earnings call, CEO Satya Nadella told analysts, “Our AI business is on track to surpass $10 billion in annual revenue next quarter, making it the fastest company in our history to reach this milestone.” He also noted that Azure OpenAI usage more than doubled in the past six months, and that AI contributed about a third of cloud services revenue growth last quarter.
Wall Street expects Microsoft’s revenues to grow 15% annually through fiscal 2027, which ends in June 2027. That makes its current valuation of 35 times earnings a bit expensive, but Microsoft deserves a premium given its strong competitive position in the field of business software and software. cloud services markets. Patient investors should consider buying a few shares today.
2. Date dog
Datadog provides observability software that allows companies to monitor, analyze and resolve performance issues in their IT infrastructure and applications. The portfolio features artificial intelligence capabilities that identify anomalies, uncover insights and automate root cause analysis. Advice Gartner has recognized Datadog as a leader in observability software, and Forrester research has recognized its leadership in AI for IT operations.
Observability software is becoming more important as computing environments become more complex, so the proliferation of AI systems should be a boost for Datadog. The company is leveraging that capability with LLM Observability, a performance monitoring solution for the large language models (LLMs) that power generative AI applications. Datadog also debuted a conversational assistant called Bits AI that leans on generative AI to streamline incident investigation.
Datadog reported strong financial results in the second quarter, exceeding expectations on the top and bottom lines. The customer base grew by 9% to 29,200, and existing customers increased their spend by more than 10%. In turn, revenue rose 26% to $690 million and non-GAAP (adjusted) net income rose 28% to $0.46 per diluted share. But the company has barely tapped into the potential of $51 billion in observability software, and sees that figure growing 11% annually through 2027.
With that in mind, Wall Street expects Datadog’s adjusted earnings to grow 19% annually through 2027. That makes the current valuation of 69 times adjusted earnings seem quite expensive. However, Datadog has exceeded Wall Street’s earnings estimates for 12 straight quarters, and its average estimate over the past year (measured in dollars) was 20% too low.
In that context, the company’s profits could grow much faster than analysts expect, especially as it taps into demand for generative AI software with products like Bits AI and LLM Observability. Wolfe Research’s Alex Zukin even opined last year that Datadog could become “the fastest-growing software company” as the generative AI boom unfolds. Patient investors should feel comfortable buying a small position today.
Trevor Jennevine has no positions in any of the stocks mentioned. The Motley Fool holds and recommends positions in Datadog and Microsoft. The Motley Fool recommends Gartner and recommends the following options: long calls in January 2026 for $395 at Microsoft and short calls in January 2026 for $405 at Microsoft. The Motley Fool has a disclosure policy.
