Datadog's S&P 500 Inclusion: A Catalyst for Short-Term Gains and Long-Term Dominance

The addition of Datadog (NASDAQ: DDOG) to the S&P 500 on July 9, 2025, marks a pivotal moment for the cloud monitoring giant. The stock surged over 10% in extended trading following the announcement, reflecting immediate demand from passive fund rebalancing. But beyond the short-term pop, this move underscores Datadog's status as a secular leader in the booming cloud observability space. Here's why investors should take note:

The Catalyst: S&P 500 Inclusion and Immediate Market Impact

When Datadog was added to the S&P 500, it replaced Juniper Networks, a legacy hardware vendor acquired by Hewlett Packard Enterprise (HPE). The change, effective July 9, triggered an influx of passive fund buying as index-tracking ETFs and mutual funds rushed to rebalance their portfolios. This dynamic is a well-known market phenomenon: S&P additions often see a 5–15% pop in the days following the announcement. For Datadog, the 10% jump in after-hours trading on July 2 previews this trend.

DDOG's stock price performance vs. the S&P 500 around July 9, 2025

Passive Fund Inflows: A Tailwind for Near-Term Momentum

The mechanics of index inclusion are straightforward: approximately $4.5 trillion in assets track the S&P 500, meaning fund managers must buy Datadog shares to mirror the index. For a company with a $46.6 billion market cap—a figure surpassing the median valuation of Nasdaq Composite constituents—this creates immediate demand. The influx could amplify Datadog's stock in the coming weeks, especially as fund rebalancing peaks ahead of the effective date.

This isn't just a one-off event. Historically, S&P additions see sustained outperformance for months post-inclusion as active managers follow the trend. For instance, DoorDash (DASH) rose 30% in the six months after its S&P 500 entry in 2023. Datadog's fundamentals—strong profitability and a critical market position—suggest it could follow a similar trajectory.

Validating Profitability and Strategic Position

Datadog's inclusion isn't merely a liquidity play. It reflects its emergence as a profitable, enterprise-scale software leader. In Q1 2025, the company reported $24.6 million in net income on $761.6 million in revenue, a stark contrast to its early-stage peers still burning cash. This profitability, paired with a 47% year-over-year revenue growth rate, positions Datadog as a rare “growth at scale” story in a sector littered with unprofitable startups.

Datadog's revenue growth vs. Splunk (now part of Cisco) and New Relic over five years

The S&P 500's decision to include Datadog while excluding Juniper Networks highlights a broader shift: legacy hardware vendors are ceding ground to cloud-native software companies. This isn't just about Datadog—it's a validation of the entire cloud observability category, where companies like Datadog help enterprises monitor hybrid and multi-cloud environments.

The Cloud Observability Play: A Secular Growth Opportunity

The cloud observability market is booming. As enterprises migrate workloads to AWS, Azure, and Google Cloud, they require tools to troubleshoot performance, security, and compliance. Datadog's platform, which integrates with all major cloud providers and offers real-time analytics, is a critical enabler of this transition.

Competitors like Cisco (post-Splunk acquisition), Elastic, and even hyperscalers like Amazon and Microsoft are scrambling to keep pace. Yet Datadog's third-party neutral position—a key selling point—gives it an edge. Its partnerships with AWS and Microsoft, while competitive, also drive cross-selling opportunities.

Valuation: Undervalued Relative to Competitors?

Despite its growth, Datadog's valuation appears reasonable compared to peers. At a price-to-sales (P/S) ratio of 6.1x (based on trailing 12 months revenue), Datadog trades at a discount to cloud software leaders like Snowflake (11.2x) and CrowdStrike (10.8x). Even compared to legacy players like Cisco (2.8x), the multiple reflects its growth profile.

Datadog's P/S ratio vs. cloud software peers (Snowflake, CrowdStrike, Palo Alto Networks)

Critics might argue that Datadog's margins are still low (Q1 2025 net margin: 3.2%). But as it scales, cost efficiencies should improve. The company's gross margin expanded to 78% in Q1, suggesting leverage exists.

Risks to Consider

• Hyperscaler competition: AWS, Azure, and Google Cloud could bundle their own observability tools, reducing Datadog's differentiation.
• Valuation correction: If the broader tech sector stumbles, Datadog's growth story could be tested.
• Regulatory scrutiny: The cloud software sector faces increasing antitrust attention, though Datadog's size and focus mitigate this risk.

Investment Thesis: Buy the Rebalancing, Hold for the Trend

In the short term, Datadog's stock offers a compelling trade ahead of the July 9 rebalancing. Passive fund flows alone could drive a 15–20% gain over the next quarter.

Longer-term, the secular tailwinds are undeniable. The shift to hybrid cloud environments is irreversible, and Datadog's platform is a must-have tool for enterprises. With a 47% revenue growth rate and a market cap that still leaves room for upside, Datadog is a buy for both tactical and strategic investors.

Recommendation: Accumulate positions in the coming weeks ahead of the S&P rebalancing. Set a 12–18 month price target of $150–$170, implying 30–50% upside from current levels.

In conclusion, Datadog's S&P 500 inclusion isn't just a liquidity boost—it's a stamp of approval on its transition to enterprise software leadership. This is a stock poised to benefit from both short-term momentum and long-term tech evolution.