Cathie Wood Predicts That AI Will Create a $13 Trillion Software Opportunity. This Stock Could Be Unstoppable If She's Right.

Key Points

• Seasoned tech investor Cathie Wood is extremely bullish on the potential of artificial intelligence.

• Wood's firm, Ark Investment Management, forecasts that AI could create a $13 trillion opportunity in the software industry by 2030.

• Datadog could be a major winner if Ark's prediction proves correct.

• 10 stocks we like better than Datadog ›

Cathie Wood is the founder and CEO of Ark Investment Management, which operates several exchange-traded funds (ETFs) that invest in innovative technology stocks. Each year, Ark releases a new issue of its "Big Ideas" report that includes predictions about the firm's areas of focus, from artificial intelligence (AI) to robotics to cryptocurrency.

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The 2025 edition included the remarkable forecast that the AI revolution could create a $13 trillion opportunity in the software space by 2030. Simply put, Ark thinks that AI coding assistants like ChatGPT will reduce development costs, resulting in more software coming to market, which will drive a productivity boom.

Datadog (NASDAQ: DDOG) offers an expanding portfolio of software and AI development tools that could be in high demand if Ark's forecast is accurate. Here's why its stock could be a great buy now for long-term investors.

Image source: Getty Images.

Datadog offers an expanding portfolio of AI tools

Datadog developed a cloud observability platform that monitors digital infrastructure around the clock, alerting businesses to technical bugs quickly so they can be fixed before they impact the customer experience.

For instance, if a retailer's website went down for customers in one specific country, it normally might not notice until sales started dropping off. Datadog would give such a business full visibility over its critical sales channels, making it aware of a problem like that the moment it arises.

Datadog's customers operate in a wide array of industries, including entertainment, gaming, manufacturing, and financial services. Many of those enterprises are starting to deploy AI software, which is creating new challenges that Datadog is now trying to solve.

Some businesses are building AI software on top of ready-made large language models (LLMs) from third-party developers like OpenAI, which is a cost-effective route. Datadog offers a product called OpenAI Monitoring that helps the customer track AI usage, costs, and error rates across their entire organization, giving them sufficient visibility to create accurate budgets and deliver a positive experience for their customers.

Other businesses are building their own LLMs, which is a more complex and costly endeavor. For them, Datadog offers a product called LLM Observability, which helps track costs and pinpoint technical issues. It also helps evaluate the accuracy of the outputs from their models, which is extremely important because erroneous responses from a chatbot, for instance, can cause serious reputational damage.

Datadog had a record 31,400 total customers at the close of the second quarter. The number of them using at least one of the company's AI products soared by 80% year over year to 4,500.

Datadog's AI revenue is soaring

Datadog generated $2.68 billion in total revenue during 2024, and it's on track to deliver a record $3.31 billion in 2025 based on the company's guidance -- which management has already increased twice this year.

Its AI business is growing like a weed, and it's starting to make a meaningful contribution to the top line. During the second quarter, AI-native customers accounted for 11% of the company's total revenue, nearly tripling from 4% in the year-ago period. That figure will be substantially higher by the end of the year if this momentum continues.

Investors will also be keeping a close eye on Datadog's bottom line. Its operating costs came in at a record $1.3 billion through the first two quarters of 2025, up by a whopping 30% from the year-ago period. The company was still profitable on a GAAP (generally accepted accounting principles) basis to the tune of $27.2 million, but that was a year-over-year decline of 68%.

With that said, after stripping out one-off and non-cash expenses like stock-based compensation, Datadog's adjusted first-half profit came in at $331.7 million, which was actually up by more than 6%. The company will have to invest aggressively in things like research and development to continue bringing new AI products to market, so its bottom-line results might be lumpy for the foreseeable future.

Datadog stock isn't cheap, but it could be a great long-term buy

Datadog stock peaked at around $193 in 2021, when a bullish frenzy about tech was driving the market. Its price-to-sales (P/S) ratio soared to above 60 back then -- a completely unsustainable valuation.

However, Datadog's P/S ratio is now hovering at a more reasonable 16.3 due to the combination of a 29% decline in its stock from that peak and the company's consistent revenue growth. That's roughly in line with its three-year average of 16.9, which suggests the stock is close to fairly valued.

DDOG PS Ratio data by YCharts.

However, this might be a case where long-term investors have no problem paying fair value for a stock (rather than waiting for a bargain price), because Datadog could experience a surge in demand for its expanding portfolio of AI products, particularly if Ark's prediction about the AI software market over the next five years proves accurate.

In fact, Datadog stock might look like a bargain at the current price when investors reflect back on this moment in 2030.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Datadog. The Motley Fool has a disclosure policy.