The S&P North American Technology Software Index has experienced a correction of 26% from its recent peak in September. While broad-market factors contribute, the current recalibration appears disproportionately focused on software equities. The prevailing narrative attributes this to concerns regarding the potential impact of generative artificial intelligence on existing software revenue streams. However, such assumptions warrant careful scrutiny.
Nvidia’s CEO, Jensen Huang, recently posited that the market’s discounting of certain software companies based on anticipated AI disruption is, to put it mildly, illogical. This perspective, while perhaps self-serving, underscores the fundamental point that AI, more often than not, represents an augmentation of existing capabilities rather than outright displacement.
Despite the sector-wide headwinds, certain equities appear to be trading at valuations that do not fully reflect their underlying fundamentals. We present an analysis of Microsoft and Datadog, two companies that, based on consensus Wall Street estimates, may offer attractive risk-adjusted return potential.
Microsoft: Sustained Momentum Amidst Technological Transition
Microsoft’s diversified portfolio of enterprise software solutions – encompassing office productivity, enterprise resource planning, business intelligence, and low-code development – provides a degree of resilience during periods of technological change. The company’s integration of generative AI copilots into its existing product suite has demonstrably improved user productivity, as evidenced by the 160% increase in paid Microsoft 365 Copilot seats during the December quarter.
Furthermore, Microsoft Azure continues to gain market share in the cloud computing space, accounting for 21% of cloud infrastructure and platform services spending in the December quarter, up from 20% in the prior quarter. This growth is driven by increased compute capacity and demand for Foundry AI services, which enable developers to build custom AI applications. Microsoft’s unique position as the sole major public cloud provider offering access to OpenAI frontier models via API represents a strategic advantage.
Morningstar analyst Dan Romanoff highlights Microsoft’s support for hybrid cloud environments as a key differentiator. This capability is increasingly important for organizations seeking to leverage the benefits of both public and private cloud infrastructure.
Currently trading at 26 times adjusted earnings, Microsoft’s valuation appears reasonable given its 24% adjusted earnings growth in the most recent quarter. The 25% decline from its recent high may present an attractive entry point for long-term investors.
Datadog: Capitalizing on Observability and AI-Driven IT Operations
Datadog develops observability and security software, offering a comprehensive platform encompassing two dozen products designed to monitor and protect critical IT infrastructure and applications. A particularly noteworthy feature is Watchdog, an AI engine that automates anomaly detection, incident alerts, and root cause analysis, enabling faster incident resolution.
The company’s leadership in AI for IT operations, as recognized by Forrester Research, positions it favorably to capitalize on the growing demand for machine learning-driven IT efficiency improvements. Gartner’s recognition of its leadership in digital experience monitoring and observability platforms further underscores its strengths.
Morgan Stanley analyst Keith Weiss notes that Datadog’s ability to consolidate a broad range of performance monitoring tools onto a single platform has made it a consistent share gainer in the observability market. This trend is expected to continue as cloud adoption and AI deployments drive increased demand for performance monitoring capabilities.
Datadog reported solid fourth-quarter results, with revenue increasing 29% to $953 million and remaining performance obligation increasing 52% to $3.4 billion, indicating strong future revenue growth potential. Non-GAAP net income increased 20% to $0.59 per diluted share, albeit at a slower pace than revenue due to ongoing investments in research and development.
Currently trading at 60 times adjusted earnings, Datadog’s valuation is undeniably premium. However, earnings are anticipated to accelerate as the proliferation of AI workloads drives demand for observability software. A measured approach, potentially involving a small initial position, may be warranted for patient investors.
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2026-03-10 11:53