Technology Giants and the AI Boom: Microsoft and Datadog in Focus

Microsoft impressed with strong financial results in the first quarter of the fiscal year 2025, significantly surpassing forecasts. Revenue increased by 16% to $65.6 billion, particularly driven by robust growth in advertising and cloud services. GAAP-calculated net income grew by 10% to $3.30 per diluted share. Notably, the recent acquisition of Activision boosted revenue by 3 percentage points but narrowed profit growth by 2 points. The company's CEO, Satya Nadella, announced during the earnings call that the AI business is expected to surpass $10 billion in annual revenue in the next quarter—the fastest business unit in Microsoft's history to reach this milestone. Additionally, the usage of Azure OpenAI has more than doubled in the past six months, with AI accounting for about one-third of the growth in cloud services in the latest quarter. Wall Street forecasts an annual earnings growth of 15% for Microsoft by the fiscal year 2027, making a valuation at 35 times earnings appear expensive. However, given the strong competitive position in enterprise software and cloud services, a premium might still be justified. Patient investors might consider purchasing some shares. Meanwhile, Datadog reported solid financial results in the second quarter, surpassing estimates. Customer growth increased by 9% to 29,200, with existing customers boosting their spending by more than 10%. This led to a 26% rise in revenue to $690 million and a 28% increase in adjusted net income to $0.46 per diluted share. Datadog sees an untapped potential of $51 billion in the observability software field, with an expected annual growth of 11% by 2027. Consequently, Datadog is expected to achieve an annual adjusted earnings growth of 19% by 2027. The current valuation at 69 times adjusted earnings appears expensive. However, since Datadog has beaten earnings expectations for 12 consecutive quarters, growth might unfold faster than analysts estimate. Particularly, the demand for generative AI software, supported by products like Bits AI and LLM Observability, could drive the upswing. Analysts like Alex Zukin from Wolfe Research predict that Datadog could become the fastest-growing software company amid the AI boom. In the stock market, Microsoft remains a questionable investment, as the Motley Fool Stock Advisor has identified other stocks as top picks. Given historical success stories, such as Nvidia, the recommended stocks could yield above-average returns in the long term.