Datadog's Earnings Outperformance: Is the Cloud Security AI Leader Undervalued Amid Rising Demand?

In the rapidly evolving landscape of cloud security and AI-driven infrastructure monitoring, Datadog (DDOG) has emerged as a dominant force. The company's Q3 2025 earnings report, released on November 6, 2025, underscored its ability to outperform expectations amid a competitive market. With revenue surging to $886 million-a 28% year-over-year increase and exceeding analyst estimates of $852.78 million-Datadog's performance has reignited debates about its valuation and growth potential. For momentum investors and growth stock enthusiasts, the question remains: Is this cloud security leader undervalued, or is its high valuation a reflection of justified optimism?

Earnings Highlights: A Recipe for Growth

Datadog's Q3 results were marked by robust revenue growth and improved operational efficiency. The company reported a GAAP net income of $33.9 million, with GAAP EPS at $0.10, far surpassing the estimated $0.02 GuruFocus report. Non-GAAP operating income reached $207 million, translating to a 23% margin-a testament to its ability to scale profitably despite rising costs TradingView report.

The company's customer base also expanded significantly, with approximately 4,060 clients now spending $100K+ in annual recurring revenue (ARR), a 16% increase YoY Investing.com transcript. This growth in large customers is critical for Datadog's long-term trajectory, as it signals the platform's value proposition in enterprise environments.

Valuation Metrics: High Multiples, High Hopes

Datadog's valuation metrics remain a focal point for investors. As of Q3 2025, the stock trades at a P/E ratio of 442.8 and a P/S ratio of 18.58 GuruFocus report. These figures, while steep, align with the company's historical premium pricing and reflect investor confidence in its growth trajectory. For context, the S&P 500's average P/E ratio hovers around 25, and its P/S ratio is approximately 1.5, highlighting Datadog's outlier status.

The absence of a publicly disclosed PEG ratio complicates a direct comparison, but the company's 28% revenue growth and 23% non-GAAP operating margin suggest a PEG ratio in the range of 15–20-a level typically reserved for high-growth tech stocks. While this may deter value investors, momentum traders are likely drawn to the stock's 15.44% pre-market surge post-earnings and its raised full-year revenue guidance to $3.386–$3.390 billion Investing.com transcript.

Analyst Sentiment and Momentum Investing Appeal

Post-earnings, Datadog's stock has become a magnet for momentum investors. The 15% pre-market rally, coupled with a $4.1 billion cash reserve, has reinforced perceptions of the company as a "flywheel" business Investing.com transcript. Analysts have praised its operational discipline, with non-GAAP operating margins stabilizing at 23% despite rising R&D and sales expenses GuruFocus report.

For momentum strategies, Datadog's outperformance is further amplified by its strategic positioning in the AI and cloud security sectors. As enterprises increasingly adopt AI-driven infrastructure, Datadog's platform-which integrates observability, security, and analytics-positions it to capture a growing share of the market. This narrative has driven inflows into the stock, with institutional ownership rising steadily over the past year.

Is the Stock Undervalued? Balancing Growth and Risk

The debate over Datadog's valuation hinges on its ability to sustain growth. While its P/E and P/S ratios appear lofty, they are justified by its 28% YoY revenue growth and expanding gross margins. However, investors must weigh these metrics against the company's GAAP operating loss of $6 million in Q3 2025 TradingView report. This loss, though narrow, raises questions about long-term profitability as Datadog continues to invest in product innovation and market expansion.

For growth stock valuation, the key is whether Datadog can maintain its current growth rate while improving GAAP profitability. If the company can achieve a 30%+ revenue growth rate and a 20%+ GAAP operating margin by 2026, its PEG ratio would normalize to a more attractive 14–16, making it a compelling buy. Conversely, a slowdown in customer acquisition or margin compression could justify a re-rating.

Conclusion: A High-Risk, High-Reward Play

Datadog's Q3 2025 results reaffirm its status as a leader in cloud security and AI-driven infrastructure. While its valuation metrics remain elevated, the company's operational execution, customer growth, and market positioning make it a compelling candidate for momentum investors. For those willing to tolerate volatility, Datadog represents a high-conviction bet on the future of enterprise technology. However, prudence is warranted: the stock's success will depend on its ability to scale profitably in a maturing market.