Data Streaming and AI Observability: Why Confluent and Datadog Are Set to Thrive in the AI Era

The rise of artificial intelligence (AI) has reshaped the software industry, with enterprises racing to adopt AI-driven solutions for data processing, real-time analytics, and system monitoring. At the heart of this transformation are companies like Confluent (CFLT) and Datadog (DDOG)—two leaders in data streaming and AI observability, respectively. Both are strategically positioned to capitalize on the $13 trillion software opportunity outlined by Ark Invest, yet their current valuations remain compellingly low. Here's why investors should pay attention.

The AI Infrastructure Play: Confluent and Datadog's Roles

Confluent: The Backbone of Real-Time Data

Confluent, the company behind the open-source Apache Kafka project, is the go-to platform for data streaming. Its software enables real-time data ingestion, processing, and distribution—a critical capability for AI systems that rely on continuous data flows. As enterprises move beyond static data lakes to dynamic, AI-powered workflows, Confluent's Kafka ecosystem is becoming indispensable.

Datadog: Observability for AI Systems

Datadog, meanwhile, dominates AI observability—the practice of monitoring and debugging complex systems. Its platform provides real-time visibility into cloud infrastructure, application performance, and even AI models themselves. With AI systems growing in complexity, observability tools are essential to ensure reliability and optimize performance. Datadog's inclusion in the S&P 500 in July 2025 underscores its institutional appeal and growing market influence.

Valuation: P/S Ratios Highlight Undervaluation

Both companies trade at historically low price-to-sales (P/S) ratios, despite strong revenue growth and strategic relevance to AI adoption:

• Confluent (CFLT):
• P/S Ratio: 3.13 (July 2025) vs. 18.32 in early 2022.
• YoY Sales Growth: 24.8% (latest quarter).

• TTM Revenue: $1.0 billion.

• Datadog (DDOG):

• P/S Ratio: 7.90 (July 2025) vs. 53.42 in late 2021.
• YoY Sales Growth: 24.6% (latest quarter).
• TTM Revenue: $2.8 billion.

Compare this to the software industry's average P/S ratio of 4.48 (July 2025) and systems software's average of 11.26. While Confluent's P/S is below industry averages, its sales growth rivals peers, suggesting investors are undervaluing its long-term potential. Datadog, though above the software average, trades at a steep discount to its 2021 peak, despite maintaining robust growth.

Why Now Is the Time to Act

1. Ark Invest's $13T Software Thesis:
   Ark's vision hinges on AI-driven software replacing legacy systems across industries. Confluent and Datadog are both enablers of this transition—streamlining data pipelines and monitoring AI systems at scale. Their undervalued P/S ratios reflect skepticism about near-term profitability, but not their strategic necessity for enterprises.

2. AI Adoption is Accelerating:
   As AI models become more integrated into core business processes, demand for real-time data infrastructure (Confluent) and observability tools (Datadog) will surge. Both companies are already seeing traction:

3. Confluent's Kafka Streams are used by 50% of Fortune 500 companies.

4. Datadog's AI observability features now account for 20% of its revenue growth.

5. Catalysts on the Horizon:

6. Confluent: Expansion into edge computing and partnerships with cloud providers like AWS and Google Cloud.
7. Datadog: S&P 500 inclusion could drive passive fund buying, while its AI-driven anomaly detection product is gaining enterprise traction.

Investment Advice: Buy the Dip, Position for AI's Next Phase

• Confluent (CFLT):
  A P/S of 3.13 is a bargain for a company growing sales at 25% annually. While losses persist (-31.4% net profit margin), investors should focus on the top-line growth and market share gains. Target price: $30–$40 by early 2026.

• Datadog (DDOG):
  At 7.90x sales, it trades below its 10-year average despite stronger margins (5.8% net profit). The stock's recent $138 price reflects undervaluation—look for a rebound to $170–$200 as AI adoption lifts demand.

Risk Factors: Both stocks are volatile, and AI adoption could face setbacks. However, their roles in core AI infrastructure make them non-discretionary plays for the next decade.

Conclusion

Confluent and Datadog are not just software stocks—they're infrastructure plays for the AI era. Their low P/S ratios today reflect short-term investor pessimism, but their growth trajectories and strategic positioning suggest a compelling upside. As enterprises double down on AI, these companies are poised to benefit disproportionately. Investors who act now could secure a multiyear growth story at bargain prices.

The time to position for AI's next phase is now. Don't miss the train.