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Datadog (DDOG), headquartered in New York City, is the premier SaaS platform for cloud-scale observability and security. It provides real-time visibility into complex technology stacks by integrating infrastructure monitoring, application performance monitoring (APM), and log management into a single "pane of glass."

Datadog stock has recently broken through a medium-term falling trend channel, signaling a potential shift toward a more horizontal or positive trajectory. While the year-to-date (YTD) performance has seen some volatility, the stock has a strong yearly yield of roughly 39%.

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Compared to the S&P 500 Information Technology Index ($SRIT), Datadog has faced significant relative headwinds over the past six months. While the broader tech index reached new highs, fueled by gains in semiconductors and mega-cap AI hardware, Datadog’s "AI defender" status has led to a more measured recovery.

Datadog reported exceptional results for its fourth quarter ended Dec. 31, 2025, with revenue surging 29% year-over-year (YoY) to $953 million. The company achieved a non-GAAP diluted EPS of $0.59, comfortably beating consensus estimates.

Profitability remained a highlight, with a non-GAAP operating margin of 22% and record free cash flow of $291 million. The company now counts over 600 customers with an annual recurring revenue (ARR) exceeding $1 million, underscoring its successful move into the large enterprise market.

For fiscal year 2026, Datadog has provided a robust outlook, forecasting total revenue between $4.06 billion and $4.10 billion. For the upcoming Q1 2026 report on May 5, management expects revenue to fall between $951 million and $961 million with a non-GAAP EPS of approximately $0.50.

JFrog (FROG), based in Sunnyvale, California, is the pioneer behind the "universal" software supply chain platform. Known as the "database of DevOps," JFrog’s Artifactory platform manages the binaries and artifacts that make up software, ensuring they are secure and automated from development to production.

JFrog is navigating a volatile period despite strong fundamental growth. The stock has seen a nearly 30% decline YTD but is up 45% over the past twelve months, largely due to a broader re-rating of mid-cap SaaS valuations and concerns over AI-automated coding seats. However, the technical pullback has created a potential "deep value" opportunity for investors.

In comparison to the Nasdaq Composite ($NASX), JFrog has been a notable underperformer throughout early 2026. As the market shifts its focus from "AI hype" to "AI security and governance," JFrog’s unique position as the curator of the software supply chain is expected to drive a significant technical recovery toward its index peers.

JFrog concluded its fiscal year 2025 with a strong fourth quarter, reporting revenue of $145.3 million, which reflected a 25% year-over-year increase and beat analyst estimates by over 5%. The company delivered a non-GAAP diluted EPS of $0.22, surpassing the $0.19 forecast.

A major catalyst for this growth was the 45% surge in cloud revenue, as more enterprises migrate their DevOps workflows to multi-cloud environments. For the full year, JFrog achieved a 27% free cash flow margin, generating $142.2 million in cash while maintaining an industry-leading 87% gross margin.

Looking toward fiscal 2026, JFrog has guided for total revenue between $623 million and $628 million, representing 17.5% growth. For the upcoming Q1 2026 results scheduled for May 7, the company expects revenue of approximately $147.3 million and a non-GAAP EPS between $0.20 and $0.22.

Morgan Stanley analysts, led by Sanjit Singh, have identified Datadog and JFrog as top picks with high potential to accelerate growth and raise their 2026 guidance. Despite recent underperformance in the software sector driven by fears of "AI-native" competition, Morgan Stanley’s industry checks reveal a healthy demand environment fueled by strong public cloud spending and a significant uptick in AI-related software development.

Datadog is highlighted as having the strongest fundamental momentum heading into its first-quarter report. Analysts maintain an “Overweight” rating with a $180 price target, signaling an upside potential of 42% from the market price while noting that the platform could see revenue growth accelerate toward the 30%+ range.

Similarly, JFrog carries an “Overweight” rating and a $70 price target with an upside of 59% from the current rate. Following a sharp selloff in February, analysts believe JFrog is positioned for a "positive move" as it captures the shift toward consolidated DevOps platforms.

Overall, the firm views these two stocks as the most attractive "setups" in the sector, as current market caution has created room for a favorable reaction to strong earnings results.

Backed by Morgan Stanley’s "attractive setup" thesis, both stocks represent high-conviction plays in the AI-driven cloud era. Datadog holds a consensus "Strong Buy" rating with a $180.61 price target, implying a 42% upside based on 37 "Strong Buy" ratings out of 44.

Similarly, JFrog carries a "Strong Buy" consensus with a $68.20 target, reflecting a massive 55% upside with 17 "Strong Buy" ratings out of 22. As enterprises consolidate spend onto dominant platforms, these two companies offer a rare combination of fundamental strength and significant technical recovery potential.

On the date of publication, Ruchi Gupta did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. This article was originally published on Barchart.com