To The Moon

Despite software budgets feeling the pinch, $Datadog(DDOG)$ continues to hunt with quiet efficiency. In its latest quarter, revenue surged 25% year-on-year to $611 million, handily beating guidance. That’s not just endurance—it’s evolution. As other software names scale back or tread water, Datadog remains a growth outlier, proving its monitoring platform has become an operational staple, not a discretionary luxury.

It’s easy to see why. Enterprises increasingly treat observability as infrastructure, not tooling, and Datadog’s platform breadth—from logs and metrics to user experience and security—helps it dig deeper into enterprise IT stacks. What’s truly fascinating, though, is where that new growth is coming from: artificial intelligence.

AI-native growth reshapes the data skyline in real time

AI Isn’t Just Noise—It’s Revenue

Twelve months ago, AI-native clients made up 3.5% of Datadog’s top line. Today, that figure has more than doubled to 8.5%. This isn’t hype; it’s hard money. While OpenAI, Anthropic, and the rest build dazzling models, Datadog is quietly monetising the infrastructure behind the curtain. Model training, deployment, orchestration—these processes generate spiky, high-volume workloads that need real-time visibility. And Datadog’s tools, engineered for scale and complexity, slot in perfectly.

This trend isn’t likely to reverse. As AI-native companies scale into production environments, their monitoring requirements won’t shrink—they’ll compound. Observability becomes critical not just for uptime, but also for model performance, cost management, and trustworthiness. In this way, Datadog is one of the few pure-play software companies directly indexing on AI’s infrastructure explosion.

Valuation: From Frothy to Fair?

Here’s the kicker: all this comes at what I’d call a sensible valuation. Datadog now trades at 13.8 times sales, near its five-year low and well off the 30x+ it fetched during the 2021 peak. Sure, its trailing P/E remains inflated at over 250, but that masks a more grounded forward P/E of 63—still expensive, but increasingly palatable for a high-growth SaaS name with strong cash flow.

More compelling is the company’s enterprise value to free cash flow multiple, which now sits around 48. That’s not cheap, but considering Datadog generated nearly $791 million in levered free cash flow over the past year with no need for profitability gymnastics, it’s clear this business has legs.

Some investors may baulk at the relatively low net margins—just 5.85%—or the YoY earnings decline of over 40%. But that obscures what’s really going on: deliberate reinvestment. Datadog is ploughing capital into platform expansion and international markets, widening its $53 billion addressable market while avoiding short-term profit polishing.

Valuation Gravity: Even High Flyers Eventually Land

One Under-the-Radar Insight

What many investors may miss is Datadog’s unusually high operating leverage. While its GAAP operating margin remains negative, its gross margin sits comfortably above 80%. This suggests that once discretionary R&D and go-to-market spend normalise—perhaps post-2026—the business could swing to far higher profitability without needing pricing hikes or layoffs. It’s a coiled spring, not a bloated machine.

Another overlooked detail: Datadog’s cash position. With $4.45 billion in cash and short-term investments and only $1.88 billion in debt, its balance sheet gives it ample flexibility. Whether it wants to snap up niche competitors or weather multiple macro storms, it can do so without diluting shareholders or begging Wall Street for capital.

Valuation clarity from the observability tower of tomorrow’s internet

Bark or Bite?

Datadog’s stock has underwhelmed in 2025, down over 16% year-to-date and trailing the S&P 500 by a wide margin. But that divergence isn’t due to business fundamentals—it’s sentiment compression. As investor attention flocks to the flashier frontiers of AI, Datadog’s infrastructure role is underappreciated. Yet its relevance is quietly deepening.

At $117 per share, the stock sits 30% below its 52-week high and well below its long-term average valuation metrics. With AI-native demand growing, robust free cash flow, and disciplined execution in a large market, $Datadog(DDOG)$ now looks more like an undervalued growth stock than a bubbly tech holdover.

In my view, the risk/reward has finally reset in favour of the patient investor. No, this isn’t a screaming bargain in absolute terms. But for a company still compounding at 25% and growing into AI’s infrastructure tailwind, it doesn’t need to be. This dog still hunts—and it’s finally back on a sensible leash.

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