Is Datadog (DDOG) a Buy Amid AI Momentum and Analyst Optimism?

In recent months, Datadog (DDOG) has experienced a sharp correction in its stock price, with shares trading at approximately $152.57 as of early December 2025-a 23.6% decline from the previous month but still up 6.2% year to date according to market analysis. This pullback, driven by conservative 2025 revenue guidance despite strong Q4 2024 earnings reported in the latest earnings report, has sparked debate among investors about whether the stock represents a compelling entry point. With a discounted cash flow (DCF) analysis suggesting an intrinsic value of $207.65 per share (a 26.5% undervaluation) and analyst price targets averaging $208.76 according to market forecasts, the question remains: Is DDOG a buy amid its strategic advancements in AI observability and a broader market re-rating?

Strategic Positioning in AI Observability

Datadog's recent expansion of its partnership with Amazon Web Services (AWS) underscores its aggressive positioning in the AI-driven observability market. Through a new Strategic Collaboration Agreement (SCA), the company has introduced tools such as LLM observability for Amazon Bedrock Agents, AI-powered debugging, and enhanced AWS Lambda and S3 integration announced in the press release. These innovations address a critical gap as enterprises increasingly rely on AI-native applications, which now account for 6% of Datadog's annual recurring revenue (ARR) and contribute five percentage points to year-over-year revenue growth according to Q4 results.

The collaboration also highlights Datadog's ability to differentiate itself in a crowded market. With over 1,000 integrations-including 100 exclusive to AWS-the platform enables enterprises to reduce investigation times for complex issues from hours to seconds according to industry reports. This capability is particularly valuable as AI workloads grow in complexity, and Datadog's AI Security for AWS Resources and Cloud SIEM Risk Insights further solidify its role in securing multi-cloud environments as detailed in the press release. Analysts note that such partnerships are part of a broader industry trend, with leading observability platforms deepening cloud integrations to address AI-specific challenges according to market analysis.

Competitive Resilience and Market Trends

Despite a high Price to Sales (P/S) ratio of 16.66x-well above the software industry average-Datadog's resilience stems from its ability to maintain growth in a competitive landscape. The company's Q4 2024 results, which included $738 million in revenue (beating estimates) and non-GAAP EPS of $0.49 as reported in earnings, demonstrate its capacity to outperform expectations. However, the projected 18-19% revenue growth for 2025, down from 25% in Q4 2024, has raised concerns about decelerating momentum as noted in the earnings report.

A SWOT analysis from DeepResearchGlobal highlights Datadog's strengths in innovation and ecosystem partnerships but also flags risks such as high valuation multiples and reliance on growth markets according to the report. While the company's AI-native business shows promise, monetization of GPU monitoring remains limited, as these workloads are still concentrated in AI-native companies as reported in Q4 results. This suggests that Datadog's long-term success will depend on its ability to expand beyond early adopters and scale AI observability solutions for mainstream enterprises.

Valuation Correction and Analyst Optimism

The recent stock correction has created a potential entry point for investors. At $152.57, DDOG trades 24% below Simply Wall St's fair value estimate according to market analysis and significantly below the DCF-derived intrinsic value of $207.65 as calculated by financial analysts. Analysts remain bullish, with 32 out of 38 firms issuing "Buy" ratings and an average price target of $208.76-implying a 42% upside from current levels according to market forecasts. Notably, Citigroup and Mizuho have raised their price targets in late 2025, reflecting growing confidence in Datadog's AI-driven growth trajectory as reported by market analysts.

However, the stock's forward P/S ratio of 13.54x remains elevated compared to the Zacks Internet - Software industry's 3.15x according to industry data, indicating that investors are paying a premium for its growth potential. This premium is justified in part by Datadog's leadership in AI observability, but it also exposes the stock to volatility if growth expectations are not met.

Risks and Considerations

Investors must weigh the risks of Datadog's high valuation against its strategic advantages. The company's reliance on rapid revenue growth leaves it vulnerable to macroeconomic headwinds or competitive pressures from cloud providers like AWS, which could offer native observability solutions. Additionally, while the AWS partnership strengthens Datadog's ecosystem, it also ties the company's fortunes to AWS's market dominance.

The recent conservative guidance has already triggered skepticism, with the stock down 9% following the Q4 2024 earnings report according to market data. This highlights the importance of execution: Datadog must continue to innovate in AI observability and demonstrate scalable monetization to justify its valuation.

Conclusion

Datadog's recent pullback, combined with its strategic advancements in AI observability and strong analyst support, presents a compelling case for long-term investors. The company's deep integration with AWS, coupled with its leadership in addressing AI-specific challenges, positions it to benefit from the secular growth of AI-native applications. While the high P/S ratio and reliance on growth metrics pose risks, the valuation correction and robust price targets suggest that the market is beginning to price in a more realistic growth trajectory. For investors with a multi-year horizon and a tolerance for volatility, DDOG appears to offer a high-conviction opportunity in the AI-driven cloud observability space.