It has been a highly volatile stretch for shareholders of cloud monitoring and security platform Datadog (DDOG +0.11%). As of this writing, the growth stock has rallied about 15% over the past week, yet shares remain down about 37% from their 52-week high.
A massive pullback like this can naturally attract investors seeking bargains. Even more, we're talking about a sell-off of a compelling business -- one in the software sector where artificial intelligence (AI) is transforming the technological landscape.
Adding to the reasons to look at the stock, Datadog has seen accelerating momentum recently.
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Accelerating growth and the AI agent catalyst
Datadog's latest quarterly update shows that the company is executing well.
Revenue in Datadog's fourth quarter rose 29% year over year to $953 million. Not only did this mark an acceleration from the 28% growth Datadog delivered in the prior quarter, but it was a meaningful acceleration over the company's full-year 2024 top-line growth rate of 26%.
Additionally, leading indicators suggest this momentum is building. The company drove a record $1.63 billion in bookings during the fourth quarter, surging 37% year over year.
And Datadog is seeing success with its most lucrative accounts. The company ended the quarter with 603 customers generating annual recurring revenue (ARR) of $1 million or more, up 31% from 462 in the year-ago period.
"We continue to see broad-based positive trends in the demand environment," explained Datadog co-founder and CEO Olivier Pomel during the company's fourth-quarter earnings call. "With the ongoing momentum of cloud migration, we experienced strength across our business, across our product lines, and across our diverse customer base."
Driving this top and bottom-line momentum is a massive secular catalyst: AI.
Specifically, the explosion of AI agents presents a unique opportunity. Large enterprises cannot trust an AI agent operating autonomously. These agents require careful monitoring for security and performance reasons. Datadog, which offers a unified platform that monitors activity across a company's servers, software, and operations, is structurally positioned to fill this need.
The company is already capturing this demand, noting that it now serves 650 AI-native customers, 19 of whom spend $1 million or more annually.
Topping it all off, profitability and cash generation were also major strengths. Datadog generated $291 million in free cash flow during the period. This translates to an impressive free cash flow margin of 31%, demonstrating the underlying operating leverage of its subscription-based software model.
Zooming out, the company generated $915 million in free cash flow for the full year, an 18% increase from 2024.
NASDAQ: DDOG
Key Data Points
Is Datadog stock a buy?
Clearly, the business is executing. But is the stock attractive at its current price?
To provide perspective, Datadog's market capitalization sits at about $45 billion -- a staggering figure for a company that generated just $3.4 billion in trailing-12-month revenue. This puts the company's price-to-sales ratio at about 13.
At a valuation multiple like this, investors are not just paying for today's strong results or its recent top-line acceleration. They are paying for the assumption that Datadog will continue to compound revenue at a robust rate while achieving substantial generally accepted accounting principles (GAAP) profits -- something it still hasn't done.
Additionally, it's worth noting that the company's full-year sales outlook arguably doesn't live up to the stock's valuation. Datadog expects revenue to be between $4.06 billion and $4.10 billion in 2026, implying a deceleration to a year-over-year growth rate of roughly 18% to 20%.
A valuation like this ultimately leaves little room for error if customer spending slows to the growth rate management guided to, or if competition intensifies. Further, the emergence of AI agents is creating a fluid competitive environment in the software sector. Investors have rightly feared that autonomous agents could make it easier to create new software on the fly, potentially disrupting established players and pressuring pricing over time.
For now, I see Datadog as an exceptional business benefiting from the undeniable tailwinds of cloud infrastructure expansion and AI adoption. But the growth stock's valuation is just too rich to entice me, personally.
