Valued at $40.6 billion, Datadog (DDOG) is a cloud-based monitoring and analytics platform seeing strong growth amid the artificial intelligence (AI) boom.
The company provides smart dashboard that allows businesses to monitor their apps, websites, and servers all in one place. It assists clients in detecting problems, tracking performance, and keeping their systems running smoothly. Datadog ended 2024 on a high note with strong quarterly numbers and continued innovation.
Datadog’s stock has dipped 17.9% year-to-date, while the S&P 500 Index ($SPX) is up 2.3%. Nonetheless, Wall Street rates this under-the-radar tech stock as a “Strong Buy,” with potential 71% upside from current levels. Let’s find out if this AI stock is a buy now.
A Small But Strong Company
Datadog’s commitment to innovation and capturing a larger market share is evident in the continuous improvement of its product offerings. The company has introduced new tools such as Live Debugger and Log Workspaces to meet the changing needs of its customers. Furthermore, strategic partnerships with major cloud providers such as Amazon (AMZN), Google (GOOGL), Oracle (ORCL), and Microsoft (MSFT) have bolstered Datadog’s multi-cloud capabilities.
In the fourth quarter, Datadog reported revenue of $738 million, a 25% year-over-year increase that exceeded consensus estimates by $23.8 million. Adjusted earnings rose 11.4% to $0.49 per share, exceeding analysts’ expectations. Datadog had about 30,000 customers at the end of the quarter, up from 27,300 the year before. Notably, enterprise adoption remained strong, with 3,610 customers reporting an annual recurring revenue of $100,000 or more, accounting for 88% of the total ARR. For the full year, revenue increased 26% to $2.68 billion, while adjusted earnings rose 37.8% to $1.82 per share. The company also generated free cash flow of $241 million, achieving a 33% free cash flow margin. For the full fiscal year 2024, the company generated $775 million in free cash flow. A positive free cash flow balance will enable the company to continue investing in its AI growth initiatives.
Datadog’s platform strategy continues to gain traction, with more customers adopting multiple products, improving its cross-sell and upsell potential. During the Q4 earnings call, management stated that 83% of customers now use two or more products, 50% use four or more products, 26% use six or more products, and 12% use eight or more. What’s more impressive is that Datadog achieved numerous significant milestones during the quarter. Notably, total ARR surpassed $3 billion for the first time, infrastructure monitoring surpassed $1.25 billion, and new products other than core observability contributed more than $200 million to ARR.
Looking ahead, management expects digital transformation and cloud migration to be key growth drivers for the company. Management expects revenue to be between $3.175 billion and $3.195 billion in fiscal 2025, with earnings ranging from $1.65 to $1.70. For fiscal 2025, analysts expect revenue to rise 19.3% to $3.2 billion and earnings to fall 7.1% to $1.69 per share. In fiscal 2026, revenue and earnings are expected to rise by 20.1% and 24.7%, respectively. Datadog stock appears to be expensive now, trading at 56 times forward 2026 earnings, but it also reflects investors’ confidence in the company’s long-term growth potential.
Is Datadog Stock a Buy, Hold, or Sell on Wall Street?
Recently, Citi analyst Fatima Boolani reiterated the “Buy” rating on Datadog stock while lowering the price target to $165. Boolani believes, “Datadog’s track record of excellent go-to-market efficiency in the enterprise software sector is expected to drive a favorable setup for fiscal year 2025.” Separately, Goldman Sachs analyst Kash Rangan reiterated a “Buy” rating and $162 price target for the stock. Rangan is impressed by Datadog’s competitive position as a strategic infrastructure software provider. The analyst predicts a strong long-term growth outlook based on AI-native customers, as evidenced by its renewal rates.
Overall, analysts maintain a positive outlook on Datadog’s growth trajectory, rating the stock a “Strong Buy.” Out of the 39 analysts covering the stock, 28 have a “Strong Buy” recommendation, three say it’s a “Moderate Buy,” and eight rate it a “Hold.” The average target price of $158.94 suggests Datadog stock can climb by 36.4% from current levels. Plus, the high price estimate of $200 implies upside potential of 71.6% over the next 12 months.
With strong financials, an expanding customer base, and ongoing innovation, Datadog’s platform is poised for long-term growth, making it an appealing AI stock to buy now. However, given its overvaluation, risk-averse investors may prefer to wait for a better entry point.
