Datadog Stock Went from Zero to Hero as AI Demand Drives Results

Spurred by the AI revolution, Datadog's (DDOG) better-than-expected first-quarter results have sparked a huge rally in the beaten-down name. Shares of DDOG stock have surged 35% in the past five days and are now up 45% year-to-date (YTD).

Given the company's tremendous potential and Wall Street's enthusiasm for shares, investors looking to buy software makers on weakness may want to consider purchasing DDOG stock. Let's take a closer look.

About Datadog Stock

Headquartered in New York, New York, Datadog is a cloud-based observability and security platform that helps organizations monitor their IT operations. Its Software-as-a-Service (SaaS) tools combine infrastructure and application monitoring, log management, user experience tracking, and cloud security.

Datadog currently has a market capitalization of $71.3 billion. Further, DDOG stock has a price-to-sales (P/S) ratio of 20.5 times.

A Look at Datadog's Q1 Results and Q2 Guidance

Datadog reported Q1 earnings on May 7. For the period, revenue jumped 32% year-over-year (YOY) to $1 billion while non-GAAP diluted EPS advanced 30% YOY to $0.60 per share. Analysts on average had predicted that revenue and adjusted EPS would come in at about $950 million and $0.50, respectively. During Q1, the company also generated adjusted operating income of $223 million and free cash flow of $289 million.

Datadog provided Q2 revenue guidance of $1.07 billion to $1.08 billion in the report. This guidance came in well above analyst estimates heading into the print.

Speaking on the Q1 earnings call, CEO Olivier Pomel noted that Datadog has recruited a significant number of new AI-oriented customers, while the firm has also made “new land deals with two of the world’s biggest AI research teams, helping them improve and optimize their training workflows.” Impressively, according to the CEO, revenue growth from both AI-oriented firms and non-AI companies accelerated in Q1.

Will Datadog Continue to Receive Big Boosts From the AI Boom?

Datadog recently launched a product that enables firms to monitor many aspects of their AI chips. According to Pomel, the company's GPU Monitoring offering increases GPU return on investment and raises “operational reliability.”

Further, according to the CEO, more than 6,500 customers provide Datadog with data “for one or more of [its] AI integrations.” Although this number represents “only 20% of total customers," these customers reportedly represent roughly 80% of annual recurring revenue.

In other words, serving AI-oriented companies is extremely lucrative for Datadog. As more AI companies emerge and existing AI firms expand, Datadog's top-line and bottom-line growth should accelerate, too.

Commenting on this AI opportunity, research firm Trefis recently reported that the advent of AI makes keeping track of IT systems much more complicated. Contending that “this shift plays directly into Datadog's strengths,” Trefis believes the trend could allow the firm's annual free cash flow to reach $2.5 billion by 2029.

Wall Street Is Becoming Enthusiastic About DDOG Stock

The strong rally in shares suggests that Wall Street is warming up to DDOG stock. In addition to Trefis, multiple other firms have been bullish on Datadog recently. 

Wedbush analyst Dan Ives recently raised his price target to $220 from $190, providing an “Outperform” rating. Calling the Q1 earnings report “transformational,” Ives asserted that "AI is a powerful demand catalyst rather than a disruptive threat” for the company.

Meanwhile, Barclays called the Q1 results “very healthy.” The bank was upbeat on the Q2 outlook, which it labelled as a a “very strong signal” since Datadog's guidance is usually more conservative. Barclays has a $148 price target and an ”Overweight rating" on DDOG stock.

Overall, Wall Street has a consensus “Strong Buy” rating on Datadog based on 45 analyst opinions.