Will Datadog Stock Sustain Growth on Rising AI Cloud Monitoring Spend?

Datadog's DDOG fourth-quarter fiscal 2025 results delivered a clear signal: demand for AI-driven cloud monitoring is accelerating, and the company is positioned at the center of that shift. Revenues climbed 29% year over year to $953 million, surpassing the high end of guidance and marking a sequential uptick of 8%, underpinned by what management described as robust usage growth from existing customers alongside strong new logo contribution. For fiscal 2025, full-year revenue growth clocked in at 28%.

The growth story is increasingly tied to AI workload expansion. More than 5,500 customers now use at least one Datadog AI integration to feed data on machine learning, LLM and AI usage back into the platform. The number of AI observability "brands" tracked on the platform grew tenfold over the past six months. A newer metric — MCP server tool calls — surged elevenfold quarter over quarter in the fourth quarter, signaling rapid traction in agentic AI workflows that demand deeper observability layers. The company's AI SRE agent, launched in general availability in December, drew more than 2,000 trial and paying customers within its first month.

Core observability metrics reinforce the platform's expanding footprint. Infrastructure monitoring ARR exceeded $1.6 billion, while both log management and APM crossed $1 billion in ARR, each growing in the mid-thirties percent range. The number of customers spending $1 million or more annually rose to 603, up sharply from 462 a year ago, and 48% of the Fortune 500 now count as Datadog customers, though the median ARR among that cohort remains below $500,000, leaving substantial room for upsell.

Datadog guided fiscal first-quarter 2026 revenues between $951 million and $961 million, implying growth of 25% to 26%, and set full-year 2026 revenue guidance between $4.06 billion and $4.10 billion. Whether the stock sustains its momentum will likely hinge on whether the AI observability pipeline continues to convert enterprise trials into durable, high-spend relationships — a dynamic that the fourth quarter's metrics suggest is gaining traction but remains in its early innings.

Rivals IBM and Microsoft Vie for AI Observability Share

As Datadog expands its AI monitoring footprint, rivals International Business Machines IBM and Microsoft MSFT are intensifying their own pushes into the space. Microsoft deepens AI observability through Azure Monitor and its broader Azure AI platform, leveraging Microsoft's vast enterprise relationships to bundle monitoring within existing cloud contracts. IBM, meanwhile, advances its observability play through IBM Instana and IBM's AIOps suite, targeting hybrid cloud environments where IBM's legacy enterprise presence remains strong. While Microsoft benefits from cross-sell scale and Microsoft 365 ecosystem lock-in, IBM leans on IBM's open-source positioning and Red Hat integration — both strategies are distinct from Datadog's usage-based, multi-cloud platform approach.

DDOG’s Price Performance, Valuation & Estimates

Shares of DDOG have plunged 5.2% in the past six-month period compared with the Zacks Internet - Software industry’s decline of 16.8%.

DDOG’s 6-Month Price Performance

From a valuation standpoint, Datadog appears overvalued, trading at a forward 12-month price-to-sales ratio of 10.22X compared with the broader Zacks Internet - Software  industry's forward sales multiple of 3.9X. DDOG carries a Value Score of F.

DDOG’s Valuation

The Zacks Consensus Estimate for DDOG’s 2026 revenues is pegged at $4.08 billion, suggesting 19.17% year-over-year growth. The consensus mark for 2026 earnings is pegged at $2.12 per share, indicating a 3.41% increase from the previous year.

Datadog, Inc. Price and Consensus

Datadog, Inc. price-consensus-chart | Datadog, Inc. Quote

DDOG stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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