This company has a strong history of growth and a long runway ahead.
The S&P 500 is widely regarded as the most comprehensive gauge of the U.S. stock market, made up of the 500 leading publicly traded companies in the country. Given the extensive reach of the businesses that comprise the index, it is hailed as the most reliable benchmark of overall stock market performance. To be considered for admission to the S&P 500, a company must meet the following criteria:
- Be a U.S.-based company
- Have a market cap of at least $20.5 billion
- Be highly liquid
- Have at least 50% of its outstanding shares available for trading
- Be profitable based on generally accepted accounting principles (GAAP) in the most recent quarter
- Be profitable over the preceding four quarters in aggregate
Datadog (DDOG 15.77%) is the latest addition to the S&P 500, scheduled to join the benchmark on July 9. That makes it one of only five companies to make the cut so far this year. Since its initial public offering (IPO) in late 2019, Datadog has soundly thrashed the market, generating gains of 315%, compared to just 109% for the S&P 500 (as of this writing). The stock price gains have been fueled by its robust underlying fundamentals, as its revenue has jumped 694% and net income has soared 2,670%.
Yet, despite the stock’s impressive performance and the company’s strong track record of growth, many believe the runway ahead is long for Datadog. Let’s examine the opportunity ahead and why Wall Street considers the stock a strong buy despite its premium valuation.
Image source: Getty Images.
Top of its game
The digital transformation is ongoing, driven by the continued adoption of cloud computing and the increasing use of artificial intelligence (AI). Many companies are heavily reliant on their digital presence, and they need a way to continually monitor their websites, apps, servers, and other cloud-based systems to ensure they stay up and running.
That’s where Datadog comes in. The company’s sophisticated monitoring and analytics platform continuously tracks cloud-based business systems, processes millions of data points every hour, and notifies developers of issues before they result in critical downtime. Datadog’s software-as-a-service (SaaS) tools go further, getting to the root of the problem to help prevent it from recurring.
Datadog boasts a lengthy list of industry accolades that underscore the strength of its monitoring and security solutions. It was selected as a leader in the 2024 Magic Quadrant by Gartner for observability platforms. It was also named in the Forrester Wave report for artificial intelligence ops platforms (AIOps) for the second quarter of 2025. There are more examples, but you get the point.
The numbers tell the tale
Don’t take my word for it. Datadog’s most recent results paint a convincing picture. In the first quarter, revenue of $762 million grew 25% year over year, resulting in adjusted earnings per share (EPS) of $0.46. Perhaps as importantly, the company’s free cash flow continues to march higher, rising to $244 million, an increase of 30%.
The strong financial results were fueled by equally robust business execution. Datadog’s customer base increased to 30,500, up 9%, while customers spending $100,000 in annual recurring revenue (ARR) jumped 13% to 3,770. Furthermore, existing customers are expanding their relationships:
- 83% of customers are using two or more products, up from 82%.
- 51% are using four or more products, up from 47%.
- 28% are using six or more products, up from 23%.
- 13% are using eight or more products, up from 10%.
This land-and-expand strategy, combined with the introduction of new products — particularly those focused on the adoption of AI — bodes well for Datadog’s future.
Wall Street is bullish
Datadog lowered its guidance earlier this year in response to the on-again, off-again tariffs, but Wall Street remains bullish. Of the 46 analysts that covered the stock thus far in July, 38 rate it a buy or strong buy, 8 label it a hold, and not one recommends selling.
Analysts at Loop Capital are among the most bullish, maintaining a buy rating and $200 price target on the stock, which suggests potential upside of 48% for investors, compared to the stock’s closing price on Wednesday. The analysts cite Datadog’s growth trajectory and increasing total addressable market (TAM) — which the company believes will hit $175 billion by 2034 — as the foundation for their optimistic call. Furthermore, they believe Datadog’s free cash flow will climb to $7.9 billion over the coming decade, which helps illustrate the company’s long-term growth potential.
To be clear, Datadog has never been cheap. The stock is currently selling for just 76 times next year’s earnings and 14 times next year’s sales. However, the most commonly used valuation metrics struggle with high-growth companies, and Datadog is no different. When measured using the more appropriate forward price/earnings-to-growth (PEG) ratio, the multiple comes in at 0.4; any number less than 1 is the standard for an undervalued stock.
Given its long history of growth, strong secular tailwinds, and Wall Street’s bullish take, I would submit that Datadog is a buy.
