These Software Stocks Could be Winners as Earnings Season Kicks into High Gear

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The bar is higher for software companies now that their stocks have been outperforming, but analysts identify some top picks whose results could shine through

Datadog is one stock that Macquarie analyst Steve Koenig recommends heading into software earnings season.

The software sector is back in style, and that means companies have more to prove when they report earnings in the days and weeks ahead.

In the 100 trading days through Monday, the iShares Expanded Tech-Software Sector ETF IGV beat the VanEck Semiconductor ETF SMH by more than 26 percentage points, according to Nicholas Colas, the co-founder of DataTrek Research.

And Macquarie analyst Steve Koenig wrote last week that software companies are facing a "more difficult" setup this earnings season given that many stocks in the sector have staged strong comebacks in recent months. Now that software valuations are higher, so too is the bar that companies have to clear with their upcoming results.

So which stocks still look like smart earnings plays? Analysts highlight some that haven't enjoyed the same level of gains as the broader sector in recent months. They also see potential in certain high-quality businesses whose momentum they expect to be on full display when the next set of earnings results hit.

Two of Koenig's software favorites are Datadog (DDOG) and Atlassian (TEAM), which report on Nov. 4 and Nov. 5, respectively.

Koenig likes the earnings setup for Datadog - a cloud-monitoring company - in part because its shares have underperformed recently.

One issue for Datadog is that there's uncertainty around the company's revenue contributions from OpenAI. The company collects "usage-based" revenue, rather than a fixed subscription revenue, making its returns from OpenAI hard to predict. The company also omitted OpenAI revenue from its forecast for the December quarter, Koenig pointed out.

Datadog's stock is up 11% in the last three months, while the iShares Expanded Tech-Software ETF IGV, a proxy for the sector, has gained 34%.

Koenig also expects Datadog to benefit from an expansion of its AI-focused customer base and from a coding boom driven by agentic AI. He wrote that the company should see increased AI-fueled demand for observability tools - which help engineers to collect metrics, analyze data and troubleshoot security issues.

Atlassian builds enterprise software for product management, and even as its shares have nearly tripled in the last three months alone, Koenig thinks sustained growth for the company's cloud products - a major revenue engine - can be a catalyst for further gains.

Ken Mahoney, the CEO of Mahoney Asset Management, is bullish on ServiceNow (NOW), which strikes him as a winner given Nvidia (NVDA) CEO Jensen Huang's high praise for the company. While it's long past the best time to buy ServiceNow, Mahoney said, "that still doesn't mean it can't perform well going forward."

ServiceNow reports earnings for its September quarter Wednesday, and Morgan Stanley's Adam Wood wrote that the company's setup for earnings looks "achievable." Since shares have outperformed recently, investors will be looking for an acceleration in revenue growth within the company's core business, as well as from the portion of its business serving the federal government.

According to his conversations, government demand is stronger this year than it was last year, due to the company's work on deals in the Middle East. Federal revenue accounts for 10% of the company's total.

StoneX analyst Yi Fu Lee told MarketWatch that Microsoft looks like a standout software pick given its diversified streams of recurring revenue, exposure to AI through the cloud, and financial strength. Microsoft posts earnings on Wednesday as well.

Writing of ServiceNow and Microsoft, Evercore ISI analyst Kirk Materne said that "the bar for both is clearly higher."

Even so, he said "the demand backdrop remains steady" for the two companies, adding that Microsoft should be able to "convert strong demand for AI into Azure upside," referring to the idea that Microsoft could positively surprise with its cloud results.

See also: Colleges raced to build massive computer-science departments. Now the boom is turning to bust.

-Hannah Pedone

 

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