Weighing Datadog’s Impressive Growth Against Its Lofty Valuation

Datadog US23804L1035

Shares of cloud monitoring and security firm Datadog continue to demonstrate resilience within a dynamic market environment, currently trading with modest volatility around the $142 mark. The company's strategic expansion, particularly its deepening footprint in artificial intelligence, is fueling its momentum.

Reporting on November 6th, Datadog's latest quarterly results surpassed analyst forecasts. The company posted adjusted earnings per share of $0.55, beating estimates of $0.45, while revenue reached $885.65 million against an expected $852.77 million. Year-over-year revenue growth remained robust at 28%.

A significant portion of this expansion is directly tied to AI. Presently, 500 AI-native firms utilize Datadog's services, and more than 5,000 customers employ its AI integrations for generative AI applications. Revenue contribution from these AI-related customers has doubled over the past year, now accounting for 12% of total revenue compared to 6% a year ago. Furthermore, business with non-AI customers also accelerated, growing at a 20% rate. The company's remaining performance obligations, a key indicator of future revenue, surged by 53%, signaling sustained demand. Management's guidance for the full fiscal year 2025 projects earnings between $2.00 and $2.02 per share.

The Valuation Question

Despite this compelling growth narrative, Datadog's stock is not considered inexpensive by traditional metrics. It trades at a forward price-to-earnings ratio of approximately 75. Its enterprise-value-to-sales multiple is estimated at just under 15, with a total market capitalization hovering around $51 billion.

This premium valuation elicits a range of perspectives from market analysts:
* Wolfe Research maintained an "Outperform" rating but reduced its price target from $240 to $185.
* Conversely, Arete Research reaffirmed a "Buy" recommendation and raised its target to $260 from $230.
* The current consensus rating on MarketBeat sits at "Moderate Buy," with an average price target of $208.76.

Shifts in Investor Sentiment

Recent activity from major investors and company insiders shows a nuanced picture. Institutional positions are being adjusted: Thrivent Financial for Lutherans decreased its holding by 10.9% in the second quarter, while Linden Advisors LP established a new position valued at $7.76 million.

Insider selling has also been notable. CEO Olivier Pomel and executive Yanbing Li both divested substantial share blocks. Over the last three months, corporate insiders have sold approximately $239 million worth of stock. However, they continue to retain a significant 8.70% ownership stake in the company, indicating ongoing vested interest alongside the profit-taking.

The core investment thesis for Datadog remains a balance between its demonstrable, AI-accelerated business growth and the high price investors must pay to participate in that story.