Datadog (DDOG -1.89%) has been a steady winner as observability becomes essential infrastructure in the cloud era. The monitoring-and-security platform specialist sells a broad suite that helps developers and security teams watch over applications, logs, infrastructure, and now artificial intelligence (AI) systems.
The business itself continues to execute. In early August, Datadog reported another quarter of double-digit top-line expansion and strong free cash flow, and it guided to continued growth in the back half of 2025. The question for investors now is not whether the company is good (it is), but whether the current price fairly reflects both the opportunity and the risks. That's where the case gets tougher.
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Impressive growth with expanding product reach
Datadog's second quarter of 2025 delivered revenue of about $827 million, up 28% year over year and roughly 9% sequentially. Management also highlighted $200 million in operating cash flow and $165 million in free cash flow, along with a GAAP operating loss of roughly $36 million as the company keeps investing for growth. Non-GAAP operating margin came in near 20%, showing healthy unit economics even as Datadog continues to expand its platform.
The company ended the period with about 3,850 customers generating at least $100,000 in annual recurring revenue -- a useful proxy for growing enterprise adoption.
Looking ahead, guidance points to steady momentum. For the third quarter, management projected revenue of roughly $847 million to $851 million and adjusted earnings per share of $0.44 to $0.46. Full-year ranges were also raised in August. While the bar remains high, this outlook suggests Datadog is navigating mixed IT budgets reasonably well, helped by a widening product footprint and land-and-expand motion.
Product velocity remains a key underpinning. At its June DASH 2025 event, Datadog announced more than 100 enhancements across observability and security, including new LLM observability, Bits AI assistants for on-call and security workflows, and features aimed at lowering data-storage costs and speeding incident response. These additions matter because they reinforce the platform-consolidation pitch: fewer tools to buy and manage, tighter workflows, and better coverage as customers move more workloads to the cloud and adopt AI.
The real issue is valuation and competition
Even with solid execution, Datadog's stock isn't cheap. With shares trading at about $137 as of this writing, the company's market cap sits at about $48 billion. Recent pricing implies a price-to-sales ratio of about 16 and a forward price-to-earnings multiple of approximately 61. Those are big numbers for a business now growing revenue at rates well above 20% with GAAP profitability still modest. If growth decelerates even a little from here, today's valuation could prove unforgiving.
Competition also looks more intense than a year ago. After Cisco closed its Splunk acquisition, the combined company has been leaning into full-stack observability and security cross-sell at massive scale. Meanwhile, cloud providers continue to bundle native tools -- AWS CloudWatch in particular -- that can look cheaper for heavy single-cloud customers. These alternatives don't erase Datadog's advantages in breadth, ease of use, and pace of innovation. But they do complicate the path to sustained share gains and could pressure pricing over time, especially as enterprises scrutinize observability and security spend.
Therefore, while Datadog remains a high-quality operator with clear product momentum, the stock still appears priced for near-flawless execution. Guidance implies healthy growth, and AI-driven workloads may keep telemetry volumes rising. But investors should weigh that upside against a valuation that already assumes strong expansion and against credible rivals that are improving fast. For now, staying patient seems reasonable. A better entry point -- whether from a pullback or from fundamentals outrunning the stock for a few quarters -- would improve the risk-reward trade-off considerably.
