Is Datadog (DDOG) a Buy Ahead of a Cloud Observability Inflection Point?

The cloud observability market is entering a pivotal phase as enterprises increasingly adopt AI-driven workloads and multi-cloud architectures. Datadog (NASDAQ:DDOG), a leader in this space, has positioned itself at the intersection of high-margin SaaS and AI innovation. With 2025 revenue guidance raised to $3.386 billion–$3.39 billion and a trailing 12-month net revenue retention rate of 120%, the company appears to be capitalizing on this inflection point. But is the stock's lofty valuation justified?

Revenue Growth and Margin Resilience

Datadog's third-quarter 2025 results underscore its growth momentum. Revenue surged 28% year-over-year to $885.6 million, driven by a 40% increase in customers with annual recurring revenue (ARR) of $100,000 or more, according to a GuruFocus report. This expansion of high-value accounts-now accounting for 89% of total ARR-highlights the company's ability to upsell and retain clients.

Non-GAAP operating margins, while not explicitly tied to gross profit, remained robust at 23% in Q3 2025, according to a Datadog Q3 earnings release. The company's hybrid pricing model, which blends host-based and service-tier pricing, supports margin stability. By contrast, peers like New Relic and Splunk rely on consumption-based or volume-driven models that may compress margins during periods of high data ingestion, according to a Monetizely article. Datadog's premium pricing for advanced AI-driven features-such as its recently launched Storage Management tool-further insulates margins, as noted in a StockTitan article.

AI-Driven Product Innovation and Market Position

Datadog's strategic investments in AI observability are paying off. The November 2025 launch of Storage Management, designed to optimize cloud object storage for AI workloads, aligns with surging demand for cost-efficient data management, according to a SimplyWall article. This product, now generally available for Amazon S3, addresses a critical pain point for enterprises grappling with ballooning cloud storage costs.

The company's leadership in the 2025 Gartner Magic Quadrant for Digital Experience Monitoring, according to a Neuron article, reinforces its competitive edge. Analysts project Datadog to achieve $5.2 billion in revenue by 2028, with earnings growing at a 19.9% annual rate, according to a UptimeRobot comparison. These forecasts hinge on its ability to maintain its first-mover advantage in AI observability, a domain where competitors like Splunk and New Relic lag in integration capabilities, according to a Datadog Q3 earnings release.

Valuation and Peer Comparison

Datadog's valuation remains a double-edged sword. While the stock trades at 84 times trailing earnings, according to a Neuron article, its revenue growth and margin profile justify a premium. By comparison, New Relic's consumption-based pricing model, though customer-friendly, may limit long-term margin expansion, according to a Monetizely article. Splunk's enterprise-focused approach, while lucrative, comes with higher implementation costs that could deter mid-market adoption, according to a UptimeRobot comparison.

The lack of explicit P/S or EV/Revenue metrics for Datadog and its peers complicates direct comparisons. However, Datadog's non-GAAP operating margin of 23% in Q3 2025, according to a Datadog Q3 earnings release,-coupled with its 28% revenue growth-suggests a more scalable business model than peers relying on volume-based pricing. Analysts project 19% annual earnings growth through 2028, according to a Neuron article, implying a path to justify its current multiple.

Risks and Considerations

Despite its strengths, Datadog faces headwinds. The 34% decline in Q3 net income, according to a Datadog Q3 earnings release, raises questions about cost discipline, while customer revenue concentration-89% of ARR from high-ARR accounts-poses a long-term risk, according to a Datadog Q3 earnings release. Additionally, the absence of peer valuation data makes it challenging to assess whether Datadog's 84x earnings multiple is sustainable, according to a Neuron article.

Conclusion: A Buy for the Long-Term

Datadog's combination of high-margin SaaS, AI-driven product innovation, and strong net retention positions it as a compelling long-term investment. While valuation concerns persist, the company's ability to outperform earnings estimates by 15% over six quarters, according to a Neuron article, and its leadership in a $10 billion+ observability market, according to a SimplyWall article, suggest the inflection point is already here. For investors willing to tolerate near-term volatility, DDOG offers a rare blend of growth and margin resilience in the AI era.