During the earnings call, CEO Satya Nadella told analysts, “Our AI business is on track to surpass an annual revenue run rate of $10 billion next quarter, which makes it the fastest business in our history to reach this milestone.” He also noted that Azure OpenAI usage more than doubled during the last six months, and that AI contributed about one-third of cloud services sales growth in the recent quarter.

Wall Street expects Microsoft’s earnings to increase at 15% annually through fiscal 2027, which ends in June 2027. That makes the current valuation of 35 times earnings look a bit expensive, but Microsoft deserves a premium given its strong competitive position in the enterprise software and cloud services markets. Patient investors should consider buying a few shares today.

Datadog provides observability software that helps businesses monitor, analyze, and resolve performance issues across their IT infrastructure and applications. Its portfolio features artificial intelligence features that identify anomalies, surface insights, and automate root cause analysis. Consultancy Gartner has recognized Datadog as a leader in observability software, and Forrester Research has recognized its leadership in AI for IT operations.

Observability software becomes more important as computing environments get more complex, so the proliferation of AI systems should be a tailwind for Datadog. The company is leaning into that opportunity 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, beating estimates on the top and bottom lines. Its customer base increased 9% to 29,200, and existing customers increased their spending by more than 10%. In turn, revenue rose 26% to $690 million and non-GAAP (adjusted) net income jumped 28% to $0.46 per diluted share. But the company has hardly tapped its $51 billion opportunity in observability software, and it sees that figure growing at 11% annually through 2027.

With that in mind, Wall Street expects Datadog’s adjusted earnings to grow at 19% annually through 2027. That makes the current valuation of 69 times adjusted earnings look quite expensive. However, Datadog has topped Wall Street’s earnings estimates for 12 straight quarters, and the average estimate in the past year (as measured in dollars) was 20% too low.

In that context, the company’s earnings could grow much faster than analysts anticipate, especially as it taps demand for generative AI software with products like Bits AI and LLM Observability. Indeed, Alex Zukin at Wolfe Research 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.

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Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Datadog and Microsoft. The Motley Fool recommends Gartner and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

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