DDOG Q3 Deep Dive: Broad-Based Growth and AI Momentum Drive Outperformance

Cloud monitoring platform Datadog (NASDAQ:DDOG) reported Q3 CY2025 results exceeding the market’s revenue expectations, with sales up 28.4% year on year to $885.7 million. On top of that, next quarter’s revenue guidance ($914 million at the midpoint) was surprisingly good and 3.2% above what analysts were expecting. Its non-GAAP profit of $0.55 per share was 20.4% above analysts’ consensus estimates.

Is now the time to buy DDOG? Find out in our full research report (it’s free for active Edge members).

StockStory’s Take

Datadog’s third quarter was marked by broad-based customer adoption and significant expansion in both AI and non-AI segments, contributing to a positive market reaction. Management highlighted accelerating usage growth among existing customers, with CEO Olivier Pomel noting, “Sequential usage growth for non-AI existing customers was the highest we have seen going back 12 quarters.” The company recorded notable wins across large enterprises and saw its digital experience and security product suites gain traction. As a result, Datadog continued to demonstrate strong retention, with gross revenue retention stable in the mid- to high 90s, underscoring the platform’s mission-critical role for customers.

Looking ahead, Datadog’s outlook is anchored by expectations of continued demand for its cloud and AI observability solutions, as well as further expansion into enterprise accounts. Management pointed to ongoing investments in AI-driven products, such as Bits AI agents and LLM observability tools, and described the customer feedback as “very enthusiastic” for these new offerings. CFO David Obstler emphasized that growth in sales capacity and product breadth is expected to drive revenue, but also noted that the company will maintain a disciplined approach to investments, stating, “We continue to grow our investments to pursue our long-term growth opportunities, and this OpEx growth is an indication of our execution on our hiring plan.”

Key Insights from Management’s Remarks

Management attributed the quarter’s outperformance to strong demand in both existing and new customer segments, increased adoption of multi-product offerings, and accelerating momentum in security and AI product lines.

• AI-driven product adoption: Datadog experienced rapid growth in its AI native customer base, with more than 500 AI-focused companies now using its platform. Management highlighted that over 100 of these customers spend more than $100,000 annually, and more than 15 spend over $1 million, reflecting broadening adoption across AI application builders, coding assistants, and infrastructure providers.
• Enterprise and new logo expansion: The company saw record new logo bookings and large expansion deals, particularly among Fortune 500 enterprises. Several new customers consolidated multiple tools onto Datadog, adopting a wide range of products including On-Call, Cloud SIEM, and Bits AI, resulting in enhanced operational efficiency and cost reduction for clients.
• Security portfolio gains traction: Datadog’s security products, especially Cloud SIEM and Flex Logs, posted growth acceleration with security annual recurring revenue rising in the mid-50% range year-over-year. Management credited product maturity and better go-to-market execution, as well as successful channel partner investments, as key factors.
• Product breadth and integrations: The company now supports over 1,000 integrations, allowing customers to unify disparate data sources across their tech stacks. This breadth has become increasingly valuable as clients seek centralized observability for both traditional and AI-driven workloads.
• Customer retention and multi-product usage: Datadog’s strategy to drive deeper customer engagement is evident in the rising share of clients using multiple products. By quarter’s end, 54% of customers were using four or more products, and 16% were using eight or more, supporting strong net revenue retention and platform stickiness.

Drivers of Future Performance

Datadog’s forward outlook is shaped by sustained cloud and AI adoption, further enterprise penetration, and ongoing investment in product innovation balanced against disciplined operational spending.

• Continued AI and cloud migration: Management expects demand for AI observability and cloud monitoring to remain robust, with new Bits AI agents and LLM observability features expanding the platform’s addressable market. CEO Olivier Pomel noted customer feedback was “very enthusiastic,” supporting further upsell opportunities.
• Enterprise sales capacity and go-to-market execution: Investments in sales teams and new go-to-market motions are anticipated to drive both new customer wins and expansion among large organizations. Management believes these efforts will support higher new logo bookings and broader product adoption.
• Operational efficiency and margin discipline: While Datadog is growing operating expenses to support long-term opportunities, CFO David Obstler pointed to ongoing cloud efficiency projects and engineering cost savings that are expected to help maintain gross margins near historical levels, even as the business scales AI-driven solutions.

Catalysts in Upcoming Quarters

In the coming quarters, the StockStory team will be watching (1) the pace of adoption and monetization for new AI observability products and Bits AI agents, (2) sustained momentum in security suite adoption, particularly Cloud SIEM and Flex Logs, and (3) execution on enterprise sales expansion and new logo bookings. Progress in integrating AI into core workflows and maintaining high customer retention will also be critical markers.

Datadog currently trades at $190.70, up from $154.98 just before the earnings. At this price, is it a buy or sell? Find out in our full research report (it’s free for active Edge members).

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