Datadog (DDOG, Financial) is a leading cloud monitoring and observability platform that has rapidly grown into a $3+ billion annual recurring revenue (ARR) business, serving as a “single pane of glass” for DevOps teams across infrastructure, application, and log analytics. In essence, Datadog helps its customers analyze vast amounts of data to identify and address performance issues in real time. Notably, the platform is trusted by nearly 50% of the Fortune 500 companies.
Although the stock has fallen almost 40% from its peak on December 6, 2024, it has still delivered a 25% compound annual growth rate over the past five years. The stock was trading at expensive multiples, but I think the recent market negativity appears to have gone too far, offering potential value.
In this article, I examine Datadog's key growth drivers, competitive advantages, and valuation dynamics, offering insights into both its near-term catalysts and long-term prospects.
Growth Engines and Catalysts
Datadog has established itself as a category leader in observability and cloud monitoring, benefitting from secular tailwinds of digital transformation and cloud migration. Its unified platform spans infrastructure monitoring, application performance management, log management, and now security, and its usage-based pricing model drives strong organic growth while expanding its footprint within its customer base.
Recent product innovations reinforce Datadog's commitment to staying ahead of market demands. Datadog spends over 40% of its sales towards research and development and has released over 400 new features and capabilities in 2024. The expansion of its Database Monitoring now supports the five most popular database types, including MongoDB, Postgres, MySQL, SQL Server, and Oracle, which enhances its appeal for data-intensive environments. Additionally, the introduction of a modern Cloud SIEM solution demonstrates its intent to strengthen security capabilities, while the launch of Kubernetes Active Remediation adds another layer of automation, helping DevOps teams resolve issues more efficiently.
These new offerings, currently categorized within the $200 million-plus “other” ARR bucket, are still in the early stages but are growing quickly. As customer adoption increases, these products not only contribute directly to revenue but also increase the stickiness of the overall platform by expanding the range of use cases. Early signs are positive as management has highlighted strong uptake of these newer security modules among large enterprises and remains confident in the long-term attach rates, particularly because these solutions are sold into an already established customer base.
A big element of Datadog's approach is collaboration closely with major cloud providers, most particularly AWS. This partnership ensures that businesses can monitor and secure their systems seamlessly, regardless of where they run, thereby enhancing Datadog's attractiveness to customers who are already committed to these cloud ecosystems. In addition, the platform's focus on real-time system monitoring and spotting problems as they happen, makes it especially valuable for companies operating in complex technological environments. For teams that demand immediate insights and rapid incident resolution, Datadog gives an edge by offering a solution that combines ease of use, robust visualizations, and effective alerting out of the box.
Recapping the Year
In 2024, Datadog demonstrated its ability to consistently deliver robust growth even in a challenging IT spending environment. The company reported full-year revenue was $2.68 billion, a 26% increase year over year (YoY), with the fourth quarter accelerating at 25% YoY.
On the earnings front, the company posted Q4 earnings per share of $0.13, while non-GAAP net income per diluted share reached $0.49 for the quarter, lifting the full-year EPS to $1.82 compared with $1.32 in the previous year. This marks Datadog's 6th straight quarter of GAAP profitability.
Margins also improved, with a non-GAAP operating margin of 24% in Q4 and 25% for the entire year, reflecting the company's efficient operations even as it invests heavily in research and development.
Source: Datadog Q4 Supplemental Information
The company ended 2024 with 30,000 customers, up 10% YoY, including 3,610 of these generating more than $100K in ARR, up 13% YoY, and 462 customers with over $1M ARR, up 17% YoY. One of the more comforting things about Datadog is that its big-spending customers not only stick around but keep spending more, as the number of customers generating over $1 million ARR rose faster than smaller cohorts, reducing Datadog's customer acquisition costs. This customer expansion, coupled with a dollar-based net retention rate that returned to the high-110%s, indicates that existing customers are consistently increasing their spend by 15% to 20% annually.
The breadth of its product adoption keeps widening. In Q4, 83% of customers used at least two Datadog products, 50% used four or more, 26% used six or more and 12% used eight or more. Record bookings surpassed the $1 billion mark, and Remaining Performance Obligations reached $2.27 billion, up 24% YoY.
Rapidly scaling “AI-native” companies (e.g. generative AI and ML-focused startups/cloud platforms) have become a notable growth driver for Datadog. Management disclosed that AI-native customers contributed about 6% of ARR in Q4 (up from 3% a year ago) and drove 5 percentage points of Datadog's YoY revenue growth in the quarter. These users generate high volumes of telemetry data, boosting Datadog's usage revenue. In the short term, this is a meaningful tailwind as more AI startups and projects come online, Datadog stands to benefit from their observability needs.
Over 2024, Datadog invested aggressively in sales & marketing (S&M), adding 600 S&M headcount, a 50% increase. Given that these new hires typically take between 9 and 12 months to reach full productivity, the benefits of this expanded sales force are expected to materialize in the latter half of 2025. This strategic ramp-up is aimed at accelerating both new customer acquisition and upsell opportunities. In my opinion, the company wouldn't increase its headcount so aggressively if the future pipeline wasn't strong enough or if management didn't believe in the tailwinds ahead.
Free cash flow (FCF) margin achieved 33% for the quarter ($241 million FCF on $738 million revenue). For the full year, FCF was $775 million, a 29% FCF margin. This places Datadog among the elite software companies that comfortably clear the “Rule of 40” of around 55. This being said, Datadog ended the quarter with $4.2 billion in cash compared to $1.6 billion in debt, with $1 billion in convertible senior notes being issued last quarter. Although these notes currently carry a low interest cost, they could lead to shareholder dilution upon conversion. Regarding dilution more broadly, despite stock-based compensation representing 22% of revenue, the impact on diluted shares has been modest, with only a 2% weighted average increase.
Looking Ahead
After a year of cloud cost optimization trends, the broader software spending backdrop appears to be steadying. Datadog noted that the overall usage growth from existing customers in Q4 remained consistent with the previous year. Larger enterprises, in particular, exhibited strong usage growth, while smaller businesses maintained stable usage with a modest uptick from Q3 to Q4. This aligns with improving trends reported by the cloud hyperscalers. Though still cautious, their growth rates appear to be bottoming out. Industry analysts have observed generally stable demand in Q4 and management teams guiding conservatively despite improving fundamentals. If macro conditions hold or improve (e.g. IT budgets loosen later in 2025), Datadog could see a pickup in organic usage growth beyond the baked-in guidance.
The company's guidance for 2025 reflects a temporary slowdown in revenue growth, forecasting a decline to 19%, the first time growth has dipped below 20% since its IPO. Management attributes this slowdown to a combination of conservative forecasting, lingering optimization by customers, tougher comps, and some pricing concessions on large renewals, especially among a select group of AI-centric clients. Q1 2025 revenue is expected to be nearly flat sequentially, suggesting that net new spend will be modest at the start of the year. Investors should view 2025 as a reset period, a year characterized by slower growth and heavy investments aimed at positioning the company for a re-acceleration in the latter half of the year. The guidance also calls for an operating margin of approximately 21% in 2025, about 400 basis points lower than in 2024, with expectations that margins will rebound in 2026 as the benefits of increased sales and R&D investments materialize.
Valuation
In the observability landscape, Datadog's primary public competitor has been Dynatrace (DT, Financial), with others like New Relic (which went private in 2023) and Elastic (ESTC, Financial) in adjacent areas (log search, etc.), plus Splunk (SPLK, Financial) historically in logs and security. Datadog's growth and market share gains suggest a widening lead.
Following the recent pullback, Datadog's valuation has moderated from its recent highs, however, Datadog continues to command a premium valuation relative to its peers, a reflection of its superior growth and robust free cash flow generation. There is a significant advantage in having Datadog's "all-in-one monitoring", rather than having to go with several platforms from different companies to attempt to achieve similar results. Datadog is also more user-friendly, with AI features boosting its performance over many competitors.
Source: Author
Currently, the stock trades at around 10× forward price to sales, a slightly elevated multiple when compared to companies like Elastic or Dynatrace, however, its PEG ratio is in line with peers. The forward P/E, though lower on a relative basis, remains elevated in absolute terms at 54x. I believe this multiple is justified by Datadog's efficient growth and its strong positioning within an attractive market. Investors, including those at J.P. Morgan, view Datadog as a “best-of-breed” asset that deserves a premium.
The market is effectively pricing Datadog as if it were a company achieving 25–30% growth rather than a sub-20% grower. The bull case is that the company will return to mid-20s growth or higher once the current near-term headwinds dissipate, making today's valuation look attractive. In contrast, if growth remains at or below the current 19% guidance due to competitive pressures or broader macroeconomic challenges, the premium could prove unsustainable, potentially compressing multiples toward those seen in peers, around 7–10× forward revenue, which would imply significant downside.
I remain convinced that Datadog will be able to return to above 20% YoY growth. In support of this view, I have conducted a discounted cash flow analysis that integrates multiple-based assumptions and a perpetuity growth model. This analysis suggests a fair value of approximately $122 per share, which implies a potential 34% upside from current levels.
Source: Author
Potential Headwinds
Management has observed that some AI-native customers are renewing at lower effective rates due to volume discounts and spend optimization. This segment could be lumpy. If a significant number of these large AI/cloud companies decide either to build in-house monitoring solutions or to negotiate more aggressively, Datadog could face headwinds in both usage growth and pricing power. Nonetheless, revenue concentration in this cohort (6% of ARR) is growing, and their spending patterns may not be as predictable as traditional enterprise clients. The risk is that optimizations by AI-native customers offset the growth they contribute, muting Datadog's overall expansion or pressuring its gross margins if concessions are made.
Datadog operates in a competitive market with both established rivals and open-source alternatives. Dynatrace, in particular, competes for large enterprise APM deals and has been refreshing its platform. Elastic offers observability via the Elastic Stack, sometimes at lower price points for log analysis. Splunk, now under Cisco's umbrella, could bundle observability with security offerings aggressively. Furthermore, cloud infrastructure providers (AWS, Azure, GCP) offer their own basic monitoring and logging tools. Any slowdown in customer acquisition or a decline in net retention rates would signal that competitors are encroaching on Datadog's market position.
Additionally, Datadog's aggressive investments in sales and marketing, as evidenced by a 50% increase in S&M headcount, present execution risks. These new hires typically require 9 to 12 months to become fully productive, meaning any delays or inefficiencies in their ramp-up could postpone the expected revenue reacceleration.
Final Thoughts
Datadog remains a compelling long-term investment, anchored by its dominant position in the observability and cloud monitoring space and a proven track record of operational excellence. Its unified, all-in-one platform has driven impressive revenue growth and high free cash flow margins, while building a durable competitive moat through widespread customer adoption and deep integration with major cloud providers. Although the near-term outlook for 2025 signals a temporary slowdown, driven by macro headwinds and geopolitical risks, the underlying fundamentals remain robust.
I view the current market pullback as a significant opportunity. The conservative guidance appears to have oversold short-term concerns, setting the stage for a potential “beat and raise” scenario as investments in sales, marketing, and product innovation begin to deliver in the latter half of the year. Moreover, I don't believe management would commit to a 50% increase in headcount unless they were confident that the resulting payout would justify the investment.
While I have long been cautious about Datadog's high valuation, the broader market volatility now presents an attractive entry point from a value perspective. Despite prevailing market fears, my analysis suggests that Datadog is poised to be a market beater over the long term.
