In this article, I have evaluated prominent software stocks, Microsoft Corporation (MSFT) and Datadog Inc. (DDOG), to determine November forecasts. After a thorough evaluation of these stocks, I believe that while MSFT could be a solid buy, waiting for a better entry point for DDOG could be ideal for the reasons discussed in this article.
An increase in the amount of business data, increasing automation of business processes and growing digitization are the main drivers of the software market. The global software market is expected to grow at a CAGR of 11.5% until 2030.
The software industry is also expected to undergo a revolution with AI and ML technology. AI-powered apps streamline operations, offer insightful data, improve judgment and improve user experience.
In addition, Gartner forecasts worldwide public cloud end-user spending to total $597.30 billion in 2023, up from $491 billion in 2022. Cloud computing is driving the next phase of digital business as companies seek disruption through new technologies such as generative AI, Web3 , and the metaverse.
MSFT is up 52.8% over the past year compared to DDOG’s 27.1% gain. However, MSFT gained 12.8% over the past month compared to DDOG’s 24.3% gain.
Here are the reasons why I think MSFT can outperform in the near term:
On October 30, MSFT announced its planned Xbox Game Studios Game Camp Asia, a two-month event running from February 20 to April 19, 2024, aimed at recognizing and celebrating game creators across five different countries and regions.
On October 26, MSFT and Submittable, a leading grants management and corporate social responsibility (CSR) platform, formed a strategic partnership to leverage Microsoft Azure and Azure OpenAI Service to develop new grants management and corporate social responsibility (CSR) solutions.
Conversely, on November 8, 2023, DDOG announced an expanded strategic partnership with Google Cloud, which enables Google Cloud customers to proactively observe and secure their cloud-native and hybrid applications within DDOG’s unified platform.
Latest financial results
MSFT’s total revenue for the fiscal 2024 first quarter ended September 30, 2023 increased 12.8% year-over-year to $56.52 billion. Its operating income rose 25% year-over-year to $26.90 billion. Additionally, the company’s net income and EPS rose 27% and 27.2% year-over-year to $22.29 billion and $2.99.
On the contrary, DDOG’s revenue rose 25.4% year-over-year to $547.53 million in the fiscal third quarter ended Sept. 30, 2023. However, its total operating expenses rose 19.8% from the prior-year quarter to $448.45 million dollars. Its net income per per share came in at $0.07 compared to negative $0.08 in the previous quarter.
Past and expected financial results
MSFT’s revenue has grown at a CAGR of 14.1% over the past year. Its revenue is expected to grow 14.5% in the current year ending June 2024 and 15.6% in the second quarter ending December 2023. Its EPS is expected to grow 14.1% this year, 18.7% in the current quarter , ending December 2023, and 6.4% in the next quarter ending March 2023.
Conversely, DDOG’s revenue has increased with a CAGR of 55% over the past three years. Its revenue is expected to rise 25.5% this year and 21.1% in the fourth quarter ending December 2023. Its EPS is expected to rise 56.4% this year, 68.4% in the current quarter ending December 2023 , and 39.5% in the next quarter ending March 2023.
MSFT’s forward non-GAAP PEG multiple of 2.41 is higher than DDOG’s 2.24. However, MSFT’s forward EV/Sales multiple of 11.18x is lower than DDOG’s 16.36x.
MSFT’s trailing 12-month gross EBITDA margin of 49.71% is higher than DDOG’s negative 3.01%. Additionally, MSFT’s trailing 12 month EBIT margin of 43.01% is higher than DDOG’s negative 4.77%.
MSFT is thus more profitable.
MSFT has an overall rating of B, which translates to a buy, in our proprietary POWR rating system. Conversely, DDOG has an overall rating of C, which corresponds to a neutral. The POWR ratings are calculated taking into account 118 different factors, with each factor weighted optimally.
Our proprietary rating system also evaluates each stock based on eight different categories. MSFT has a B grade for stability, which is justified by its beta of 0.88. On the other hand, DDOG has a D grade for stability which is in sync with its beta of 1.01.
Among the 45 stocks in the B-rated Software – Business industry, MSFT is ranked #12, while DDOG is ranked #22.
In addition to what we have mentioned above, we have also assessed both stocks for growth, sentiment momentum, value and quality. Get all MSFT ratings here. Click here to view DDOG ratings.
The software industry is experiencing significant growth, mainly driven by the rapid advancements in blockchain, artificial intelligence, cloud computing and machine learning. Industry players such as MSFT and DDOG are well positioned to benefit from these industry windfalls.
However, DDOG’s poor profitability makes competitor MSFT the best buy.
Our research shows that the chances of success increase when investing in stocks with an overall rating of Strong Buy or Buy. See all the best rated stocks in the Software – Business industry here.
So what to do?
Discover 10 widely traded stocks that our proprietary model shows have huge downside potential. Please ensure that none of these “death trap” stocks are lurking in your portfolio:
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MSFT stock was trading at $372.92 per share on Thursday morning, up $3.25 (+0.88%). Year-to-date, MSFT is up 56.56%, versus an 18.50% gain in the benchmark S&P 500 index over the same period.
About the Author: Nidhi Agarwal
Nidhi is passionate about capital markets and asset management, which led her to pursue a career as an investment analyst. She has a bachelor’s degree in finance and marketing and is currently in the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities. More…