Morgan Stanley sees these stocks rewarding investors this earnings season based on at least one key indicator each

Morgan Stanley expects positive KPI surprises this earnings season, highlighting Datadog and DraftKings as likely upside candidates. Datadog is seen beating first-quarter revenue expectations for 2026, while DraftKings is forecast to top adjusted EBITDA estimates for Q1 2026 after a 29% share decline over the past 12 months. The note suggests earnings recovery remains intact and that broadening price/earnings leadership could support select stocks.

Analysis

The key signal is not “beats are good,” but that in this phase of the cycle the market is rewarding evidence of operating leverage and not just headline EPS. That favors names where a modest demand or pricing surprise drops disproportionately to the bottom line, and it also means the reaction function should be strongest in crowded quality/growth software and consumer-discretionary names where positioning is still fragile. In other words, the alpha is in KPI selectivity: revenue quality for DDOG, margin/EBITDA conversion for DKNG, and the market is likely to punish any miss harder than usual because investors are already paying for a recovery narrative.

DDOG has a cleaner setup than most software peers because AI-led complexity is expanding the addressable value of observability rather than cannibalizing it. If that thesis shows up in revenue acceleration, the second-order effect is multiple expansion not just for DDOG but for adjacent infrastructure software where the market has been worried about AI disintermediation. The risk is less about demand decay and more about the market dismissing the beat as “consumption-driven but not durable,” which would cap the upside after an initial pop.

DKNG is more of a sentiment-and-execution trade: a better EBITDA print can re-rate the stock if it confirms that new product lines are offsetting competitive pressure faster than feared. The market is likely underestimating how quickly incremental product diversification can improve unit economics if customer acquisition costs stabilize. The contrarian risk is that investors may extrapolate one good quarter into a full-year turn, but guidance discipline remains the key limiter; if management stays cautious, the stock could give back gains within days even on a beat.

Key Decisions for Investors

• Long DDOG into earnings with a 1-2 week horizon; prefer call spreads over outright stock to capture a potential post-print multiple re-rating while limiting downside if management frames the beat as non-recurring.
• Long DKNG into the print, but size smaller than DDOG; best risk/reward is a tactical trade into the release with a stop on any guide-down or commentary implying EBITDA is being pulled forward from later quarters.
• Relative-value pair: long DDOG / short a broad software basket or weak infrastructure-software peer group for 1-4 weeks; thesis is that AI-related observability demand is one of the few software sub-sectors with improving end-demand instead of just valuation support.
• If DKNG beats EBITDA but trims/maintains full-year guidance conservatively, take profits quickly on the first 5-8% move; the market may reward the quarter but punish any lack of upward revision.
• Avoid chasing post-earnings strength beyond the first session unless both KPI and forward commentary improve; these names can gap up on the print and then mean-revert if the market decides the surprise was already priced.