Datadog's Revenue Growth at Risk as Gen AI Labs Develop Their Own Observability Solutions.

Datadog's revenue growth could be impacted by the development of observability solutions by generative AI labs. Despite its strong moat, product breadth, and quality, the company is not considered a value play. Datadog is being kept on a watchlist and may be reconsidered at a better entry point.

Datadog (NASDAQ: DDOG) reported robust second-quarter results, with a 28% year-over-year revenue increase to $827 million, exceeding Wall Street estimates. The company's earnings of $0.46 per share also surpassed expectations. CEO Olivier Pomel attributed the growth to the increasing adoption of AI-native customers, who accounted for 11% of Datadog's top line, up from 4% in the previous year [1].

However, the development of observability solutions by generative AI labs could potentially impact Datadog's revenue growth. While Datadog's strong moat, product breadth, and quality provide a solid foundation, the company is not considered a value play. Its high forward earnings multiple of 76 suggests that investors may be anticipating significant growth, which could lead to a reevaluation of its valuation [1].

Despite the potential threat from generative AI labs, Datadog's recent quarterly results indicate strong demand for its cloud-based solutions. The company's customer base increased by 9% year over year, and existing customers spent more on its services. Additionally, Datadog's dollar-based net retention rate improved to 120%, indicating strong customer loyalty [1].

Institutional investors have shown strong interest in Datadog, with Itau Unibanco Holding S.A. significantly increasing its stake by 1,714.6% in the first quarter, acquiring an additional 5,504 shares. Other major institutions, such as Goldman Sachs Group Inc. and Janus Henderson Group PLC, also increased their holdings, highlighting strong institutional confidence in the company's prospects [2].

Given the potential impact of generative AI labs and the current valuation, Datadog may be best considered a watchlist stock. Investors should monitor the company's progress and reevaluate its entry point at a more favorable price. While the threat from generative AI labs is real, Datadog's strong fundamentals and customer adoption of its AI tools suggest that it could emerge as a leader in the observability space.

References:
[1] https://www.aol.com/1-magnificent-artificial-intelligence-ai-131500824.html
[2] https://www.marketbeat.com/instant-alerts/filing-itau-unibanco-holding-sa-buys-5504-shares-of-datadog-inc-ddog-2025-08-29/