Why Datadog Is the AI Infrastructure Firm to Watch Out For

Shares of cloud monitoring and security services firm Datadog Inc. (NASDAQ: DDOG) have been on a rollercoaster ride this year. They declined sharply between February and April before rising again through late July. In August, the stock once again fell, bringing DDOG's full year-to-date (YTD) performance to -11.4%. 

Investors may understandably be reluctant to enter a position in Datadog now, given its earlier decline just months ago. However, as one of the most widely touted stocks on the market, 24 out of 30 analysts view it as a Buy, there's also a case to be made that this latest dip presents an opportunity for interested investors.

Shares of DDOG are down even amid a fairly strong earnings report. The company has a flood of new products in the works that should further cement its niche position in the fast-growing cloud and AI spaces.

Growth in these spaces also means demand for security is increasing, and Datadog's security business is booming. All together, these reasons make a compelling case for the firm's consensus price target of $152.93, which is about 20% above current levels.

Earnings Breakdown: Good News Despite "Soft" Figures

Datadog’s early-August slump may partly reflect investor concerns over its second-quarter 2025 earnings report, which some analysts characterized as “soft” on profits. Even so, the company outperformed Wall Street's revenue and earnings per share (EPS) expectations. Revenue rose 28% year-over-year (YOY) to nearly $827 million, exceeding forecasts by $35 million, while EPS came in at $0.46, five cents above estimates.

A major driver of this growth is the company’s AI-native customer base, which now accounts for about 11% of total revenue and roughly 10% of YOY growth, up sharply from just 4% of revenue a year earlier.

Datadog's early-August slump may be partly due to its second-quarter 2025 earnings report, which analysts have criticized as being "soft" on profits. However, the firm beat analyst predictions for revenue and earnings per share (EPS). Revenue climbed by 28% year-over-year (YOY) to reach nearly $827 million, $35 million ahead of predictions, while EPS of 46 cents per share was 5 cents up from expectations.

AI-native customers are driving this growth, with that segment representing about 11% of total revenue and about 10% of YOY revenue growth. This category of customers contributed only 4% of the revenue a year ago.

The firm also sees an increasing share of big customers with annual recurring revenue (ARR) of at least $100,000. As of the end of the quarter, there were some 3,850 Datadog customers in this group, up 14% YOY. Though renewals among these large customers could occasionally lead to some revenue volatility, they give the firm a strong foundation of solid, recurring revenue on which to rely.

This also helped to boost operating and free cash flow considerably. Operating cash flow of $200 million was up nearly 22% year over year, while free cash flow of $165 million was up about 15% over the same period.

Perhaps even more importantly, Datadog raised its guidance at the time of the release. It now expects full-year 2025 revenue to reach a range of $3.312 billion and $3.322 billion. Investors might take this as reassurance that the firm's AI tools continue to drive interest among potential customers.

Wave of New Products, Particularly in AI, Leads to Security Boost

Speaking of AI tools, at its annual DASH conference in June, Datadog announced a lineup of new and soon-to-come products 125, focusing on AI-centered tools to meet increasing demand. These include autonomous AI agents to monitor security, AI-based cloud coding assistants, enhanced data observability tools, and more. 

The firm's Bits AI SRE, Dev Agent, and Security Analyst are the ones to watch for in particular. These tools are helping to drive overall customer growth and increase revenue from existing customers.

The firm explained that, as of the end of the quarter, AI tool adoption had reached approximately 4,500 of its approximately 31,400 customers.

As it becomes increasingly common for companies across sectors to utilize cloud AI infrastructure, these firms will also require more in-depth monitoring and security solutions. Security-related ARR topped $100 million in the second quarter, representing YOY growth in the mid-40% range.

Datadog's new AI tools should help it solidify its position as the go-to AI security tool provider.

DDOG shares are not cheap: the company's P/E ratio is a sky-high 363.6. However, if it can realize the growth that analysts predict, a 67.8% increase in earnings in the coming year, for instance, this valuation will be much easier to justify. Fresh off its inclusion in the S&P 500 last quarter, DDOG has officially joined the big dogs. Buying the current dip may be warranted.

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The article "Why Datadog Is the AI Infrastructure Firm to Watch Out For" first appeared on MarketBeat.