Datadog (DDOG) Stock Analysis: Strong Growth Faces Valuation and Competition

Datadog Overview and Performance

Datadog (DDOG) has been a consistent winner in the observability space, which has become essential in the cloud era. The company offers a broad suite of solutions that help development and security teams monitor applications, logs, infrastructure, and artificial intelligence (AI) systems. The company continues to execute well. In early August, Datadog reported another quarter of double-digit top-line expansion and strong free cash flow, and it guided to continued growth in the back half of 2025. The question for investors now isn't whether the company is good (it is), but whether the current price fairly reflects both the opportunities and the risks. That's where the case gets tougher.

Impressive Growth with Expanding Product Reach

Datadog's second quarter of 2025 delivered revenue of approximately $827 million, up 28% year-over-year and roughly 9% sequentially. Management also highlighted $200 million in operating cash flow and $165 million in free cash flow, along with a GAAP operating loss of roughly $36 million as the company keeps investing for growth. Non-GAAP operating margin came in near 20%, demonstrating healthy unit economics even as Datadog continues to expand its platform. The company ended the period with approximately 3,850 customers generating at least $100,000 in annual recurring revenue—a useful proxy for growing enterprise adoption. Looking ahead, guidance points to steady momentum. For the third quarter, management projected revenue of roughly $847 million to $851 million and adjusted earnings per share of $0.44 to $0.46. Full-year ranges were also raised in August. While the bar remains high, this outlook suggests Datadog is navigating mixed IT budgets reasonably well, helped by a widening product footprint and land-and-expand motion.

Product Velocity Remains a Key Underpinning

At its June DASH 2025 event, Datadog announced more than 100 enhancements across observability and security, including new LLM observability, Bits AI assistants for on-call and security workflows, and features aimed at lowering data-storage costs and speeding incident response. These additions are significant because they reinforce the platform-consolidation pitch: fewer tools to buy and manage, tighter workflows, and better coverage as customers move more workloads to the cloud and adopt AI.

The Real Issue is Valuation and Competition

Even with solid execution, Datadog's stock isn't cheap. With shares trading at about $137 as of this writing, the company's market cap sits at about $48 billion. Recent pricing implies a price-to-sales ratio of about 16 and a forward price-to-earnings multiple of approximately 61. These are high figures for a business now growing revenue at rates well above 20% with GAAP profitability still modest. If growth decelerates even slightly from here, today's valuation could prove unforgiving. Competition also appears more intense than a year ago. After Cisco closed its acquisition of Splunk, the combined company has been leaning into full-stack observability and security cross-selling at a massive scale. Meanwhile, cloud providers continue to bundle native tools—AWS CloudWatch, in particular—which can seem cheaper for large single-cloud customers. These alternatives don't negate Datadog's advantages in breadth, ease of use, and pace of innovation. However, they complicate the path to sustained market share gains and could pressure pricing over time, especially as enterprises scrutinize observability and security spending. Therefore, while Datadog remains a high-quality operator with clear product momentum, the stock still seems priced for near-flawless execution. Guidance implies healthy growth, and AI-driven workloads may keep telemetry volumes rising. However, investors should weigh that upside against a valuation that already assumes strong expansion and against credible rivals that are improving quickly. For now, remaining patient seems reasonable. A better entry point—whether from a pullback or from fundamentals outrunning the stock for a few quarters—would improve the risk-reward trade-off significantly.