Contrary to the trend, on the eve of the financial report, Morgan Stanley recommends five software stocks including Datadog (DDOG.US) and Palantir (PLTR.US).

Morgan Stanley stated that several companies, including Datadog (DDOG.US), JFrog (FROG.US), Palantir Technologies (PLTR.US), Atlassian (TEAM.US), and Dynatrace (DT.US), have the potential to show slight acceleration in growth and raise their full-year guidance before the software stock quarterly results are announced. The institution pointed out that despite significant underperformance in their stock prices, the demand environment remains healthy. Analysts led by Sanjit Singh at the firm mentioned that in the past month, infrastructure software stocks (excluding new-generation cloud service providers) have fallen by about 15%, underperforming the IGV index (-13%) and the Nasdaq index (+1%), mainly due to concerns about renewed competition in AI. "Nevertheless, our industry discussions during the quarter indicated a strong demand environment in the first quarter, with a cautious optimism for 2026, reflecting strong public cloud spending, continued resilience in cloud migration, significant increase in new software development related to AI, and a trend towards enterprises spending more on platform suppliers rather than point solution providers," Singh and his team stated. The analysts at the firm also mentioned that they have not heard of any negative impact on first-quarter order bookings due to escalating political tensions or rising energy prices, but if the current situation persists, it could become a risk factor later in the year. "In terms of suppliers, among the companies set to report earnings in the coming weeks, our channel checks on Datadog show the strongest fundamentals, followed by Palantir and JFrog. Feedback on Dynatrace is also positive, while results on Appian and Atlassian are mixed. Our optimistic assessment from discussions with partners is also supported by the latest survey of Chief Information Officers (CIOs) which shows an improvement in software budget growth expectations from 3.7% in the previous quarter to 4.1%," Singh and his team stated. The analysts at the firm added that since these stocks have already declined before the release of first-quarter results, they believe the most attractive investment targets are Datadog, JFrog, and Palantir, as Atlassian (ending its fiscal quarter at the end of June) and Dynatrace (this quarter) still need to provide initial guidance for the 2027 fiscal year, which typically brings additional risk factors. Datadog Morgan Stanley rates Datadog as "overweight" with a target price of $180. "Datadog entered the first quarter in a strong position, with clear fundamental growth momentum, slight improvements in channel feedback, and the potential to further accelerate revenue growth to over 30%, with upside potential in second-quarter and 2026 full-year performance expectations," the analysts stated. Singh and his team pointed out that although the stock's valuation multiples are still at a premium level, recent pullbacks and more cautious positioning create room for a positive response in Datadog's stock price once the performance meets expectations. JFrog Morgan Stanley rates JFrog as "overweight" with a target price of $70. "JFrog entered the first quarter on a positive note, with recent performance showing strong fundamental growth momentum, an improved feedback loop in channel checks, and our analysis forecasting a re-acceleration of growth in the first quarter, with upside potential in second-quarter and 2026 full-year performance expectations," Singh and his team stated. The analysts added that while the stock is still trading at a premium, the sell-off in February following the announcement of Claude Code Security by Anthropic leaves room for further price increase. Palantir Morgan Stanley rates the stock as "neutral" with a target price of $205. Singh and his team stated that Palantir entered the first quarter in a strong position, with outstanding fundamental momentum, positive channel feedback, and potential upward revisions in performance expectations, contrasting with the more cautious positioning after recent pullbacks. "The fundamentals remain exceptionally strong, led by accelerating growth in the U.S. market, expanding adoption by large customers, and leading industry profit margins, making the path to achieve the $100 billion revenue goal even more credible," the analysts added. Atlassian Morgan Stanley rates Atlassian as "overweight" with a target price of $120. Analysts led by Keith Weiss mentioned that at the time of releasing third-quarter earnings, market sentiment towards Atlassian remained low as the stock has declined relative to the Nasdaq index over the past month. "The market expects cloud/total revenue growth of 23%/25% in the third quarter, 22.6%/19.5% in the fourth quarter, while we forecast Atlassian's cloud revenue to grow by 27%-28% in the third quarter, total revenue to grow by 28%-29%, cloud revenue to increase by about 24% in the fourth quarter, total revenue to grow by 20%-21%, both expectations higher than market consensus," Weiss and his team stated. The analysts added that this should provide support for the stock price, but they expect the upward trend to be difficult to sustain as broader AI skeptics towards seat-based licensing software models may still not be resolved. Additionally, analysts stated that concerns about next quarter's 2027 fiscal year guidance being below consensus expectations will continue to remain an unresolved shadow. Dynatrace Morgan Stanley rates the stock as "neutral" with a target price of $43. "Dynatrace's recent situation has improved entering the fourth quarter, with fundamentals stabilizing, positive feedback in channel checks, better-than-expected performance, and the potential for a slightly upward revision in guidance framework to support a positive market response after the earnings report," the analysts stated. However, the analysts pointed out that achieving a more meaningful revaluation of the valuation still remains challenging, as investors may still need more concrete evidence to prove that Annual Recurring Revenue (ARR) can re-accelerate growth after this quarter.