Potential Increase of 2,790% in Demand for Generative AI Software Sales: Two Notable AI Companies Favorably Endorsed by Financial Institutions
Advanced AI technologies, primarily utilizing large language and machine learning models, are driving the production of various media types such as images, text, and videos. This field experienced a significant breakthrough with OpenAI's introduction of ChatGPT in November 2022, leading to an anticipated surge in demand.
According to Bloomberg Intelligence, spending on generative AI software is predicted to increase an astounding 2,790% by 2032, amounting to approximately $320 billion, with an annual compound growth rate of 52%. This presents a substantial investment opportunity that might rival the one presented by the internet in the 90s.
Two companies, Microsoft (MSFT -0.15%) and Datadog (DDOG -1.46%), are poised to exploit this increasing demand for generative AI software. Both companies have received positive ratings from Wall Street:
- From the 57 analysts tracking Microsoft, 91% advise buying the stock. The median price target of $500 per share implies a potential increase of 18% from the current share price of $425.
- Among the 44 analysts tracking Datadog, 88% recommend purchasing the stock. The median price target of $150 per share indicates a potential increase of 18% from the current share price of $127.
Here's what investors need to know about Microsoft and Datadog:
1. Microsoft
Microsoft, the world's largest commercial software corporation, owes its dominance to its strengths in business productivity (Office), enterprise resource planning (Dynamics), and various cybersecurity sectors. The company is leveraging this strength with AI copilots, with encouraging early results. Currently, almost 70% of Fortune 500 corporations utilize Microsoft 365 Copilot, which automates tasks in applications like Word and Excel.
Beyond software, Microsoft also operates the second-largest public cloud service (Azure), accounting for 20% of cloud infrastructure and services in the latest quarter, although that figure is 3 percentage points lower than last year. However, an analysis from Morgan Stanley has named Microsoft as the vendor most likely to gain market share over the following three years, largely due to its AI-driven partnership with OpenAI.
Microsoft reported robust financial results in the first quarter of the 2025 fiscal year, which concluded in September 2024. Revenue rose by 16% to $65.6 billion, primarily due to strong sales growth in advertising and cloud services. Meanwhile, GAAP net income increased by 10% to $3.30 per diluted share. The recent acquisition of Activision contributed 3 percentage points to sales growth and 2 points to earnings growth.
During the earnings call, CEO Satya Nadella stated, "Our AI business is on track to surpass a $10 billion annual revenue run rate next quarter, making it our fastest business to reach this milestone." He also mentioned that Azure OpenAI usage had more than doubled during the past 6 months, and AI contributed about one-third of cloud services sales growth during the quarter.
Analysts anticipate Microsoft's earnings to grow at 15% annually through 2027, ending in June 2027. Although the current valuation of 35 times earnings might appear pricey, Microsoft's strong competitive position in enterprise software and cloud services markets merits a premium. Patient investors should consider investing in the company's shares today.
2. Datadog
Datadog provides businesses with observability software, enabling them to monitor, analyze, and address performance issues in their IT infrastructure and applications. Its portfolio boasts AI features that detect anomalies, provide insights, and facilitate root cause analysis. Gartner has placed Datadog among the leaders in observability software, while Forrester Research has recognized its dominance in AI for IT operations.
Observability software becomes increasingly important as computing environments become increasingly complex, and the increasing use of AI systems should act as a tailwind for Datadog. The company is capitalizing on this opportunity with LLM Observability, a solution for monitoring the performance of large language models (LLMs) used in generative AI applications. Datadog also introduced Bits AI, a conversational assistant that leverages generative AI to simplify incident investigations.
Datadog reported strong financial results in the second quarter, exceeding estimates on both the revenue and profit fronts. The company's customer base increased by 9% to 29,200, while existing customers increased their spending by more than 10%. Consequently, revenue rose by 26% to $690 million, and non-GAAP (adjusted) net income increased by 28% to $0.46 per diluted share. Despite largely untapped opportunities in the $51 billion observability software market, Datadog sees its 11% annual growth rate through 2027 continuing.
Analysts expect Datadog's adjusted earnings to grow by 19% annually through 2027. Although the current valuation of 69 times adjusted earnings seems expensive, Datadog has consistently surpassed Wall Street's earnings estimates for 12 consecutive quarters. Analysts' estimates have, on average, been 20% too low over the past year.
Given Datadog's ability to exceed market expectations and capitalize on the generative AI boom with products like Bits AI and LLM Observability, earnings growth potential may exceed analyst estimates. Patient investors should consider investing in the company's shares today.
In the realm of finance and investing, Microsoft and Datadog are two companies that have received positive analyst ratings due to their involvement in the booming generative AI market. Microsoft's strength in software and cloud services, coupled with its partnership with OpenAI, has analysts predicting an annual growth rate of 15% for its earnings through 2027. On the other hand, Datadog's observability software, which includes AI features for anomaly detection and root cause analysis, is expected to show a 19% annual growth in earnings through 2027, despite its currently high valuation. Given these expectations, savvy investors might consider investing in the shares of both companies.
