In this article, I have evaluated prominent software stocks, Microsoft Corporation (MSFT) and Datadog Inc. (DDOG), to determine November projections.  After thoroughly evaluating these stocks, I think 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.

A surge in the volume of enterprise data, rising automation of business processes, and growing digitization are the major drivers of the software market.  The global software market is expected to grow at a CAGR of 11.5% until 2030.

Also, the software industry is expected to undergo a revolution with AI and ML technology. AI-powered apps are streamlining operations, offering insightful data, improving judgement, and enhancing user experiences.

In addition, Gartner forecast worldwide public cloud end-user spending to total $597.30 billion in 2023, an increase from $491 billion in 2022. Cloud computing propels the next phase of digital business as companies pursue disruption through emerging technologies such as generative AI, Web3, and the metaverse.

MSFT has gained 52.8% over the past year as 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 might perform better in the near term:

Recent Developments

On October 30, MSFT announced its planned Xbox Game Studios Game Camp Asia, a two-month event spanning from February 20 to April 19th, 2024, aimed at recognizing and celebrating game creators across five diverse 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 in developing new solutions for grants management and corporate social responsibility (CSR).

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.

Recent Financial Results

MSFT’s total revenue for the fiscal 2024 first quarter that 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. Moreover, 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 increased 25.4% year-over-year to $547.53 million in the fiscal third quarter that ended September 30, 2023. However, its total operating expenses rose 19.8% from the previous-year quarter to $448.45 million. Its net income per share came in at $0.07 as compared to negative $0.08 in the previous-year quarter.

Past And Expected Financial Performance

MSFT’s revenue has increased at a CAGR of 14.1% over the past year. Its revenue is expected to increase 14.5% in the current year ending June 2024 and 15.6% in the second quarter ending December 2023. Its EPS is expected to gain 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 at a CAGR of 55% over the past three years. Its revenue is expected to increase 25.5% this year and 21.1% in the fourth quarter ending December 2023. Its EPS is expected to gain 56.4% this year, 68.4% in the current quarter ending December 2023, and 39.5% in the next quarter ending March 2023.

Valuation

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.

Profitability

MSFT's trailing-12-month gross EBITDA margin of 49.71% is higher than DDOG’s negative 3.01%. In addition, MSFT’s trailing-12-month EBIT margin of 43.01% is higher than DDOG’s negative 4.77%.

Thus, MSFT is more profitable.

POWR Ratings

MSFT has an overall rating of B, translating to a Buy, in our proprietary POWR Ratings system. Conversely, DDOG has an overall rating of C, which equates to a Neutral. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct 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.

Beyond what we’ve stated above, we have also rated both stocks for Growth, Sentiment Momentum, Value, and Quality. Get all MSFT ratings here. Click here to view DDOG ratings.

The Winner

The software industry is experiencing significant growth, largely propelled 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 tailwinds.

However, DDOG's poor profitability makes its competitor MSFT the better buy.

Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Software - Business industry here.

What To Do Next?

Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:

10 Stocks to SELL NOW! >

MSFT shares were trading at $372.92 per share on Thursday morning, up $3.25 (+0.88%). Year-to-date, MSFT has gained 56.56%, versus a 18.50% rise in the benchmark S&P 500 index during the same period.

Nidhi is passionate about the capital market and wealth management, which led her to pursue a career as an investment analyst. She holds a bachelor's degree in finance and marketing and is pursuing the CFA program. Her fundamental approach to analyzing stocks helps investors identify the best investment opportunities.

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