Datadog's Relative Strength Rating Upgrade and Its Implications for Growth Stock Rotation

The recent upgrade of Datadog's (DDOG) Relative Strength (RS) Rating to 83 from 80 marks a pivotal moment for the company and the broader AI infrastructure sector. This technical milestone, which measures the stock's 52-week performance relative to peers, underscores Datadog's emergence as a market leader in cloud observability and AI-driven infrastructure monitoring, according to Investors Business Daily. The upgrade coincides with a broader shift in investor sentiment, as capital increasingly flows toward AI infrastructure providers amid a sector rotation that is reshaping the tech landscape.

Datadog's Financial Momentum and Analyst Optimism

Datadog's RS rating upgrade is underpinned by robust financial performance. In Q3 2024, the company reported a 26% year-over-year revenue increase to $690 million, with non-GAAP operating margins stabilizing at 25%, as noted by Investors Business Daily. Analysts have taken notice: 16 firms have issued bullish or somewhat bullish ratings in the past three months, with an average 12-month price target of $162.19 and a high of $190.00. This optimism is driven by Datadog's dominance in AI observability, a niche where it has secured the "Leader" designation in the 2025 Gartner Magic Quadrant for Observability Platforms for the fifth consecutive year, according to the same Investors Business Daily coverage.

The company's strategic investments in AI-native tools, such as LLM Observability and Bits AI agents, have further solidified its competitive edge. These innovations address a critical gap in enterprise AI adoption: the need for real-time monitoring and security of AI systems. With over 4,000 customers as of mid-2025, Datadog's "land-and-expand" strategy-coupled with net revenue retention rates exceeding 120%-has enabled it to deepen relationships with large enterprises, per the Investors Business Daily reporting.

Sector Leadership in AI Infrastructure

Datadog's momentum aligns with a broader trend: the rapid reallocation of capital toward AI infrastructure. A report by Dynamic Global Insights highlights investors shifting funds from legacy cloud and SaaS providers to AI infrastructure and chipmakers, with companies like Nvidia and Super Micro posting double-digit gains, a trend also covered by Investors Business Daily. This rotation is fueled by surging demand for GPUs and data center capacity, as AI training and deployment require unprecedented computational power.

The sector's growth is further amplified by corporate IT strategies. A 2025 State of AI Infrastructure Report reveals that 70% of organizations are allocating at least 10% of their IT budgets to AI, while 81% of IT leaders attribute AI initiatives to C-suite leadership, according to a Forbes report. However, infrastructure constraints-such as power limitations and skills shortages-remain significant barriers, with 44% of respondents citing IT infrastructure as the top obstacle to scaling AI projects, as the Forbes report details.

Datadog's inclusion in the S&P 500 in July 2025 has only intensified institutional interest in the company. Its stock surged 15.32% to $155.69 following the inclusion, reflecting confidence in its ability to navigate these challenges. Analysts at Wells Fargo, for instance, have initiated an "overweight" rating, citing Datadog's leadership in AI-powered cloud observability and its expanding enterprise footprint, as noted in the Forbes coverage.

Implications for Growth Stock Rotation

The AI infrastructure sector is now a focal point for growth stock momentum. Goldman Sachs Research outlines a four-phase AI investment cycle, with Phase 2 prioritizing infrastructure providers such as semiconductor manufacturers and data center operators. Datadog's position in this ecosystem-offering tools to monitor and secure AI workloads-positions it to benefit from this phase.

Moreover, the sector's long-term potential is staggering. AI infrastructure is projected to account for 35% of total tech capital expenditures by 2027, up from 12% in 2022, a shift documented by Investors Business Daily. This shift is reshaping corporate IT budgets, with AI initiatives increasingly taking precedence over traditional cloud migrations. For investors, the key takeaway is clear: companies that serve as the backbone of AI deployment-rather than merely offering applications-will outperform.

Risks and Competitive Dynamics

Despite its strengths, Datadog faces challenges. The AI infrastructure market is highly competitive, with rivals like Splunk and Dynatrace vying for market share. Additionally, cybersecurity risks are escalating as AI expands attack surfaces, necessitating robust governance frameworks, as the Forbes report highlights. However, Datadog's aggressive R&D spending-43% of H1 2024 revenue-ensures continuous innovation, including the recent launch of agentic AI observability tools, according to Investors Business Daily.

Conclusion

Datadog's RS rating upgrade is more than a technical indicator; it reflects the company's strategic alignment with the AI infrastructure boom. As capital flows toward this sector, Datadog's leadership in observability and its ability to address enterprise AI challenges position it as a prime beneficiary of growth stock rotation. For investors, the message is unambiguous: the next phase of the AI trade is infrastructure, and Datadog is at the forefront.