Datadog Just Cracked the S&P 500, Wall Street Thinks It’s Just Getting Started

Datadog (NASDAQ: DDOG) is officially joining the S&P 500 on July 9. Shares are up by more than 15% since the announcement, adding to what’s already been a stunning multi-year run. Since going public six years ago, Datadog has skyrocketed by over 4x, nearly triple the S&P 500’s return over the same period.

But even after that massive run, Wall Street is still pounding the table. Analysts see lots of room for it to keep running. So what exactly is fueling all this optimism, and is there still time to jump in?

Key Points

• Datadog’s rare S&P 500 inclusion triggers fresh demand and signals strong fundamentals.

• Rapid expansion and deep AI integration position Datadog as a core cloud infrastructure play.

• Despite a high multiple, its growth-adjusted PEG of 0.4 points to undervaluation.

What Most Investors Miss About S&P Inclusion

Index inclusion triggers a wave of forced buying from trillions of dollars worth of passive funds. In fact, a recent Goldman Sachs study found that newly added stocks typically outperform the S&P 500 by 5% over the following six months.

But Datadog’s case is especially interesting. It’s one of just five companies added to the index this year, and the only one with its roots in cloud infrastructure monitoring, a niche that’s becoming mission-critical for Fortune 500 companies navigating the AI era.

Datadog Is the Nervous System of the Cloud

If you’re not in tech, Datadog might sound like just another SaaS stock. It’s not.

Think of Datadog as the central nervous system for modern digital businesses. The platform watches everything, from servers and APIs to mobile apps and containers, and flags problems before they spiral into outages. It’s like a smoke alarm, security guard, and mechanic for your digital operations, all rolled into one.

And it’s really fast. The system ingests trillions of data points daily and alerts developers in near-real time. Even NASA has leaned on Datadog for space mission monitoring simulations.

This ability to detect and diagnose problems across sprawling infrastructure has put Datadog at the top of industry rankings. It was named a “Leader” in Gartner’s 2024 Magic Quadrant for observability and also scored top marks from Forrester in the AIOps category, a segment that uses AI to automate IT operations.

A Growth Story Hiding in Plain Sight

Datadog has increased revenue by nearly 700% since going public. Net income is up by more than 2,600%.

Better yet, Datadog’s land-and-expand strategy is producing remarkable customer stickiness. As of the latest quarter:

• 83% of customers now use 2 or more products

• Over half use 4 or more

• And 13% use 8+ products, up from just 10% last year

Datadog isn’t just adding new clients, it’s growing inside them. That’s a key signal for long-term profitability, especially in a macro environment where winning new logos is getting harder.

Even more impressively, Datadog is growing efficiently. Free cash flow hit $244 million last quarter, up 30%, with an enviable gross margin of 80%. That’s the kind of financial profile you’d expect from an established software titan, not a still-growing disruptor.

Datadog’s AI Potential

Datadog isn’t just benefiting from the shift to the cloud, it’s increasingly a play on AI infrastructure.

Why? Because AI models don’t run in isolation. They rely on thousands of interconnected cloud services, and companies need visibility across that digital maze to ensure things don’t break. Datadog’s newer AI-focused tools help detect model drift, flag anomalous behavior in AI systems, and monitor inference performance in production.

As AI becomes more deeply embedded into mission-critical workflows, monitoring tools like Datadog could shift from “nice-to-have” to “non-negotiable.” That tailwind is just beginning.

In fact, Datadog estimates its total addressable market will grow from $62 billion today to $175 billion by 2034, a nearly threefold expansion. Much of that growth will come from AI-native observability.

Valuation Looks Steep Until You Dig Deeper

Datadog isn’t cheap, though. It trades at 76x forward earnings and 14x forward sales. On the surface, that screams “expensive.”

On a forward PEG ratio, Datadog sits at just 0.4, well below the 1.0 threshold typically used to spot undervalued growth stocks. That tells you the market may be underestimating how fast this company can continue to grow earnings.

Loop Capital certainly thinks so. The firm recently reaffirmed its Buy rating and slapped a $200 price target on the stock, implying nearly 50% upside from current levels. Their bullish thesis hinges on Datadog’s expanding product suite, growing AI use cases, and expected free cash flow of $7.9 billion over the next decade.

The Bottom Line

Datadog isn’t just the newest member of the S&P 500, it’s one of the most intriguing stories in enterprise software right now.

With growing AI use cases, sticky customer relationships, best-in-class margins, and accelerating free cash flow, Datadog has all the hallmarks of a compounder in the making. Wall Street clearly agrees, but the broader market may still be catching up.

If you’re looking for a way to play the digital infrastructure boom, without betting directly on hyperscalers like Amazon or Microsoft, Datadog deserves a serious look.