Datadog (DDOG): An AI-Driven Rebound Play at Multiyear Valuation Lows

Datadog (NASDAQ: DDOG), a leader in cloud-based monitoring and observability, presents a compelling investment opportunity as its valuation hits multiyear lows while AI-native revenue surges. Despite sector volatility, the company's undervalued price-to-sales (P/S) ratio, robust analyst sentiment, and strategic AI integration position it as a top rebound candidate. Here's why investors should consider adding Datadog to their portfolios.

Valuation: A Rare Discount in a Growth Stock

Datadog's P/S ratio has plummeted from its 2021 peak of 53.4x to a current 12.57x (as of June 2025), marking its lowest level since late 2022. This represents a stark discount to its historical average of 20–25x over the past five years. For comparison, peers like Microsoft (P/S 12.3x) and Uber (P/S 3.8x) trade at similar or lower multiples, but Datadog's revenue growth of 24.6% year-over-year (Q1 2025) far outpaces most of its competitors.

The P/S compression stems from broader market skepticism toward high-growth software stocks, not fundamental weakness. In fact, Datadog's TTM revenue hit $2.68 billion, up from $2.16 billion a year ago, while its free cash flow nearly doubled to $244 million in Q1 2025. This combination of strong execution and valuation discounts creates a rare entry point.

Analyst Sentiment: A Bullish Consensus Amid Mixed Signals

Despite a volatile stock price—down 25% from its 2023 high—analysts remain overwhelmingly bullish. As of June 2025, 28 of 33 analysts rated Datadog a “Buy” or “Strong Buy”, with an average price target of $138.21 (implying a 15% upside from its current price of $120). Notable upgrades include Bank of America's “Top Pick” status and RBC Capital's raised target to $150, citing AI-driven growth and execution excellence.

While some firms have downgraded Datadog due to macroeconomic concerns, the consensus remains optimistic. Key catalysts include its AI-native product adoption, cloud observability leadership, and the recent acquisition of Metaplane, which strengthens its data observability offerings.

AI-Native Revenue: The Growth Engine Ignites

The AI-native customer cohort, defined as those using Datadog's AI/ML and LLM (Large Language Model) observability tools, now accounts for 8.5% of total ARR (up from 3.5% a year ago). This segment's rapid expansion reflects enterprise demand for tools to monitor and optimize AI/ML workloads, a trend that's only accelerating.

Datadog's AI-native products, such as Flex Logs (which hit $50 million in ARR within six quarters) and Bits AI, are reducing troubleshooting time for customers. The company also leads in AIOps according to The Forrester Wave™, a testament to its product innovation.

With AI-native customers growing faster than the company's overall base, this segment could become a 15–20% contributor to ARR within two years. This would significantly boost margins as AI-native workloads typically command premium pricing.

Why Cloud Monitoring Dominates in an AI World

Enterprises are increasingly adopting AI and machine learning, but these complex systems require advanced monitoring to ensure reliability and performance. Datadog's platform, which integrates logs, metrics, and traces into a unified view, is uniquely positioned to capitalize on this shift.

• Market Tailwinds: The global observability market is projected to grow at a 17% CAGR, reaching $12.6 billion by 2027.
• Competitive Edge: Datadog's 3,770+ customers with $100K+ ARR (up 13% year-over-year) reflect strong retention and upselling opportunities.
• Product Innovation: Over 400 new features in 2024 alone, including AI SRE and LLM Observability, solidify its lead in observability.

Risks to Consider

• Sector Volatility: Software stocks remain sensitive to interest rate fluctuations and macroeconomic uncertainty.
• Competitor Pressure: Hyperscalers like AWS and Google Cloud are expanding their observability offerings.
• Debt Levels: Datadog's debt-to-equity ratio of 1.5x (vs. industry average 0.5x) could constrain flexibility during downturns.

Conclusion: A Strategic Buy at These Levels

Datadog's 12.57x P/S ratio, strong analyst support, and AI-native revenue growth make it a standout rebound play. With its cloud observability niche aligned perfectly with enterprise AI adoption and a price target suggesting 15–25% upside, the stock offers asymmetric risk/reward.

Investors should consider a gradual accumulation strategy, using dips below $100 (near its 2023 lows) as entry points. The 2025 guidance of $3.215 billion–$3.235 billion in revenue (20% growth) and AI-native ARR expansion provide clear catalysts.

In a market wary of growth stocks, Datadog's fundamentals and undervaluation make it a compelling contrarian bet. For investors with a 3–5 year horizon, now is the time to position for this AI-driven rebound.

Disclaimer: Always conduct your own research and consult a financial advisor before making investment decisions.