Wolfe Research strategist Alex Zukin upgraded Datadog(NASDAQ: DDOG) to outperform earlier this week. He set a 12-month price target of $140 per share, implying 26% upside from its current price, citing the essential nature of its performance-monitoring software.
Specifically, Zukin wrote the following in a note to clients: "Even in a cost-cutting-obsessed macro environment, engineers simply cannot live without their Datadog." He went on to say that interest in generative artificial intelligence could help Datadog become the fastest-growing software company.
Here's what investors should know about this growth stock.
Datadog is a leader in artificial intelligence for IT operations
Datadog specializes in observability and cybersecurity software for development, operations, and security teams. Its platform integrates data from across the corporate technology stack to provide organizations with real-time visibility into their applications, networks, and infrastructure, helping them identify and fix performance issues and security threats in a timely fashion.
Datadog has also infused its platform with a powerful artificial intelligence engine that can automate the detection and investigation of problems to accelerate time to resolution. Indeed, Forrester Research recently recognized the company as a leader in AI for IT operations, citing its ability to provide superior data insights and visualizations, its more extensive team of data scientists, and its impressive innovation pipeline as key differentiators.
Other industry analysts share a similarly positive perception of Datadog. Consultancy firm Gartner recently recognized its leadership in application performance monitoring and observability software, citing its broad portfolio of well-integrated products as a key strength. And research company G2 recently recognized Datadog as a leader in network monitoring, log monitoring, and database monitoring software.
Datadog is an innovation machine
Datadog's strong foothold in several observability software verticals has consistently translated into solid financial results, and that pattern continued in the first quarter. Its customer count increased 29% to 25,500, and the average customer spent north of 30% more in the past year. In turn, first-quarter revenue rose 33% to $482 million and non-GAAP net income jumped 17% to $0.28 per diluted share.
Looking ahead, investors have good reason to believe Datadog can maintain its momentum, as the company has demonstrated an extraordinary capacity for innovation over the years. What started as a simple real-time data platform has evolved into an extensive suite of observability and cybersecurity software, and its product portfolio continues to grow quickly.
Datadog recently introduced a workflow automation product that streamlines the entire remediation process. It also debuted a data streams monitoring product that helps prevent downtime in data pipelines that supply critical applications. And it announced new integrations with OpenAI that allow clients to monitor usage patterns, performance, and costs associated with its generative AI models, including the GPT family of large language models that power ChatGPT.
Why Datadog stock is worth buying
Looking ahead, the investment thesis for Datadog is straightforward: IT environments are becoming more complex as organizations undergo cloud migrations and other digital transformations, and that trend means observability and cybersecurity software are becoming increasingly important. Indeed, while Datadog estimates its total addressable market at $45 billion this year, management expects that figure to reach $62 billion by 2026.
So what? Datadog is already well positioned to benefit from that opportunity, given its strong presence in several observability software verticals, but its capacity for innovation is an added bonus that should keep the company on the cutting edge of the industry for years to come. And with shares trading at roughly 20 times sales -- not a cheap price, but still a significant discount to the three-year average of 36.7 times sales -- patient investors should consider buying a small position in this AI growth stock today.
10 stocks we like better than Datadog
When our analyst team has a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
They just revealed what they believe are the ten best stocks for investors to buy right now... and Datadog wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of July 17, 2023
Trevor Jennewine has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Datadog. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
