Datadog's (NASDAQ:DDOG) stock recently hit an all-time high after the company announced a strategic partnership with Microsoft (NASDAQ:MSFT).

Microsoft will integrate Datadog's dashboard, which helps companies analyze their full infrastructure, into its cloud platform Azure as a "first-class service." This means companies can set up Datadog automatically on Azure instead of manually migrating their data.

This certainly sounds like another big win for Datadog, which has nearly quadrupled in value since its IPO last September. But is its stock still worth buying at these levels?

A woman examines data on a com,puter.

Image source: Getty Images.

What does Datadog do?

Many large companies host their data across a wide range of servers, cloud services, apps, and software services. Monitoring all that data simultaneously can be difficult, so Datadog's platform breaks down the silos and pulls the fragmented data onto a single dashboard.

Over 400 platforms, including Cisco's Meraki, Amazon's (NASDAQ:AMZN) cloud-based tools, and Microsoft's Active Directory, already support Datadog's software "out of the box" -- which means they're ready to feed data to its dashboard.

How fast is Datadog growing?

Datadog's revenue rose 83% to $362.8 million in 2019, but its net loss widened from $10.8 million to $16.7 million. In the first half of 2020, its revenue rose 77% year-over-year to $271.3 million, and it squeezed out a GAAP profit of $6.8 million, compared to a loss of $13.4 million a year earlier. On a non-GAAP basis, it posted a profit of $36.5 million, compared to a loss of $12.3 million a year ago.

Datadog's newfound profitability is impressive, since other silo-busting software companies like Snowflake and JFrog -- which both recently went public -- remain unprofitable.

Datadog expects its revenue to rise 56%-58% for the full year, and to post non-GAAP earnings of $0.11-$0.13 per share, compared to a loss of $0.01 per share in 2018. Analysts expect its revenue and non-GAAP earnings to rise 35% and 25%, respectively, next year.

How could Microsoft help Datadog?

Datadog's total number of customers with annual recurring revenue of at least $100,000 grew 71% year-over-year to 594 at the end of the second quarter. It also recently added one-click integration to Amazon Web Services (AWS), the world's largest cloud infrastructure platform.

Servers in a data center.

Image source: Getty Images.

Locking in Microsoft's Azure, the world's second-largest cloud platform clearly complements Datadog's integration with AWS and other cloud services. It also reduces the threat of direct competition from Microsoft and Amazon's own cloud infrastructure monitoring tools.

By strengthening its ties to Azure and AWS, Datadog can widen its moat against other high-growth rivals like Splunk and Elastic, as well as diversified tech giants like Cisco and IBM.

Corey Sanders, Azure's corporate VP, declared Azure was the "first cloud to enable a seamless configuration and management experience for customers to use partner solutions like Datadog." However, that statement also suggests Microsoft is leaving the door open for similar deals with Datadog's rivals -- so investors shouldn't mistake this "strategic partnership" for an exclusive deal.

Beware the expectations and valuations

Datadog's stock has generated impressive returns over the past year, but it's now valued at over 40 times next year's sales. That frothy valuation, which bakes in decades of robust growth, could limit the stock's upside potential.

That being said, Datadog's streamlined approach to monitoring data, its expanding customer base, and its tight integration into the world's top cloud platforms could all justify that premium valuation. I personally believe Datadog's stock is still worth nibbling on at these levels, and that its deal with Microsoft highlights the growing market demand for unified data silo-busting services.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.