Rosenblatt's Buy Case: Why Datadog's Growth Fundamentals Outweigh Macro Headwinds

Datadog's investment case rests on a powerful combination of a massive and expanding market, a platform that becomes more valuable with each new user, and a financial engine that funds its aggressive growth. The company is not just riding a trend; it is actively reshaping the landscape to capture a larger slice of the future.

The foundation is a network effect that creates formidable switching costs. Datadog's platform has reached a milestone of over 1,000 integrations, making it the most comprehensive observability and security suite. This breadth is its moat. As enterprises embed Datadog across their infrastructure, applications, and security workflows, the cost and complexity of migrating to another system rise exponentially. This lock-in drives exceptional customer retention, a key indicator of a sticky, scalable model.

This platform strength is now being leveraged to attack new, high-growth frontiers. The company is aggressively expanding its total addressable market into AI-driven observability and security, a direct response to the industry's most pressing challenges. This isn't a minor product tweak; it's a strategic pivot backed by rapid innovation. At its recent DASH conference, Datadog launched 125+ new products, including a full suite of AI Observability tools and security agents. This move positions Datadog at the center of the AI adoption curve, where observability for complex, dynamic AI workloads is becoming a non-negotiable requirement.

Financial execution validates this growth strategy. In the third quarter of 2025, Datadog delivered 28% year-over-year revenue growth to $886 million, with a robust $214 million in free cash flow. This strong cash generation funds the R&D needed to maintain its technological edge and customer acquisition. The company is also scaling its largest customer base, with about 4,060 $100k+ ARR customers, up 16% from a year ago. This expansion of high-value accounts demonstrates the platform's ability to cross-sell and deepen relationships, turning early adopters into strategic, multi-product clients.

Together, these points paint a picture of a scalable, cross-selling machine. The platform's vast integration library creates a flywheel: more customers drive more integrations, which attract more customers. This is then amplified by a TAM expansion into AI, a market Datadog is entering with a wave of new products. The financial results show this model is working today, providing the capital to dominate tomorrow. For a growth investor, this is the setup: a company with a wide moat, a clear path to a larger market, and the financial discipline to execute.

Analyst Rationale: Separating Growth Outlook from Macro Noise

The recent analyst actions on Datadog highlight a clear split in perspective, with Rosenblatt Securities offering a disciplined view that separates the company's long-term growth from near-term market noise. On January 30, the firm reiterated its Buy rating but lowered its price target from $200 to $180. This move was explicitly framed as a response to macro headwinds impacting the enterprise software segment, a tactical adjustment to reflect broader valuation pressures rather than a change in fundamental outlook.

Rosenblatt's constructive stance is grounded in its expectation for the upcoming quarter. The firm noted it expects Datadog to post Q4 results largely in line or slightly above the Street's expectations. This confidence in the underlying financial trajectory is key. It signals that the analyst views the company's core growth engine-driven by platform adoption, TAM expansion, and customer expansion-as resilient enough to navigate the current macro environment. The target cut is a recognition of external pressures, not a loss of faith in the business model.

This contrasts with other analysts, like those at BMO Capital, who cited more specific operational risks. BMO's target reduction also reflected concerns that OpenAI might migrate its workloads away from Datadog. However, even BMO acknowledged that the timing and scale of the migration remain uncertain, and it maintained a Buy rating. This underscores the difference between a cyclical, macro-driven reassessment and a fundamental shift in competitive dynamics.

For a growth investor, Rosenblatt's rationale is instructive. It frames the current situation as a classic case of separating the signal from the noise. The macro headwinds are real and are pressuring valuations across the sector. Yet, the expectation for solid Q4 results suggests Datadog's secular growth trends-its platform scalability, AI observability push, and expanding customer base-are still on track. The analyst's action is a reminder that for companies with a wide moat and a large TAM, cyclical pressures can create buying opportunities if the underlying growth story remains intact.

Valuation Disconnect: Growth Metrics vs. Market Sentiment

The market is pricing Datadog as if its growth story has stalled. Despite robust fundamentals, the stock has been under severe pressure, creating a significant disconnect between its financial performance and its valuation.

Over the past month, Datadog's share price has fallen nearly 15%. This decline has pushed its forward enterprise value-to-sales multiple down to 11.7, a level not seen since 2020 and well below the sector average of 15.9. In a single day earlier this week, the stock swung as much as 6.3%, reflecting heightened volatility and a lack of conviction among traders. This depressed multiple suggests the market is discounting the company's future cash flows heavily, likely due to fears of prolonged enterprise software spending cuts.

Yet the underlying business continues to execute. In the third quarter of 2025, Datadog posted 28% year-over-year revenue growth to $886 million, backed by a solid $214 million in free cash flow. The company is also scaling its most valuable customers, with about 4,060 $100k+ annual recurring revenue accounts. This financial discipline funds its aggressive expansion into new markets, like AI observability, which was underscored by the launch of 125+ new products at its DASH conference.

The bottom line is a clear mispricing. The market is reacting to macro headwinds-fears of reduced IT budgets-that are pressuring valuations across the software sector. Analysts like Rosenblatt have acknowledged this, lowering price targets to reflect broader sector pressures. But for a growth investor, the key question is whether these cyclical fears are overshadowing the company's secular advantages: a vast integration moat, a rapidly expanding TAM, and a proven ability to scale high-value customer relationships. The current valuation appears to be betting against Datadog's ability to navigate the downturn and maintain its growth trajectory, a bet that may be overly pessimistic given its financial strength and strategic positioning.

Catalysts and Risks: The Path to Sustained High Growth

The immediate path for Datadog is set to unfold in the coming weeks. The company's Q4 2025 earnings report and investor day on February 10 will be the critical catalyst for validating its growth strategy and management's guidance. This event comes on the heels of analyst downgrades that framed the current environment as one of macro headwinds. For a growth investor, the setup is clear: the market is pricing in a slowdown. The February 10 events will test whether the underlying business can prove that secular trends are still accelerating.

The primary near-term risk is a tangible slowdown in enterprise software spending. This is the macro pressure that has already prompted price target cuts from firms like Rosenblatt and BMO. A broad-based pullback in IT budgets would directly pressure Datadog's revenue growth and could squeeze margins as the company navigates a more competitive landscape. The risk is not theoretical; it is the very noise that analysts are trying to separate from the signal. The upcoming earnings call will be scrutinized for any shift in guidance or customer sentiment that might confirm these fears.

Yet the counterbalance is a powerful growth engine in the making. The key opportunity lies in cross-selling new AI and security modules. Datadog's platform is built for this. Its recent launch of 125+ new products, including a full suite of AI Observability tools, is designed to deepen customer relationships and expand the average contract value. As enterprises grapple with the complexity of AI workloads, Datadog's integrated platform becomes more essential, not less. This cross-sell potential is the mechanism that could accelerate growth beyond the core observability market, turning a defensive posture into an offensive one.

The bottom line is a tension between cyclical risk and structural opportunity. The February 10 catalyst will determine which force is in control. If Datadog can demonstrate resilience in its core metrics while showcasing strong adoption of its new AI and security modules, it will reinforce the thesis that its wide moat and expanding TAM can weather macro storms. The depressed valuation, with a forward EV/Sales near 11.7, already assumes the worst. The company's path to sustained high growth depends on proving that assumption wrong.