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When the Cloud Gets Choppy, This Stock Stands Watch
Noah Zelvis
August 27, 2025
A leading name in cloud observability is under pressure. Shares are down more than 12% year to date, and sentiment is divided.
Yet, with accelerating earnings revisions, revenue growth exceeding 20%, and expanding demand for SaaS monitoring, the setup may reward investors who position themselves carefully.
Datadog [DDOG] provides a platform for monitoring, security, and analytics across modern cloud infrastructure.
Its tools track applications, servers, and user activity, giving enterprises a single pane of glass for observability.
In a world where businesses rely heavily on multi-cloud and hybrid IT environments, Datadog’s role is becoming essential.
The company benefits from deep integration with public cloud providers like AWS, Microsoft Azure, and Google Cloud.
Customers can add Datadog modules for logs, security, and application performance, creating a sticky product ecosystem that expands wallet share over time.
As companies adopt AI and scale SaaS workloads, observability is a core requirement, not a luxury.
Action: Investors should consider building positions between $120 and $130, with a focus on the long-term adoption of Datadog’s full-stack observability suite as the primary driver of growth. |
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Momentum Drivers: Growth Remains Resilient
Recent results highlight the underlying strength of the business. Datadog delivered Q2 revenue of $826.8 million, up 28% year over year, beating consensus estimates by nearly 5%.
EPS of $0.46 also topped expectations, extending its streak of quarterly beats.
Forward guidance implies continued momentum. Analysts project revenue of $3.3 billion for fiscal 2025, a 23% increase, followed by $3.9 billion in 2026, a nearly 18% increase.
These growth rates are enviable compared to most software peers.
Earnings revisions are trending upward. The consensus estimate for 2025 EPS has risen more than 28% in the past month to $1.81, while 2026 EPS is projected to grow another 16% to $2.10.
This trend suggests analysts are warming up despite recent share weakness.
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Valuation: Expensive but Backed by Growth
Datadog trades at roughly 321 times trailing earnings and about 63 times forward earnings, placing it firmly in the premium category.
On a price-to-sales basis, shares fetch over 13 times next year’s revenue, compared to an industry average closer to 8.
The justification lies in growth and cash generation. Free cash flow totaled $791 million last year, providing Datadog with the flexibility to reinvest in innovation.
Gross margins remain strong above 75%, supporting the case for operating leverage as revenue scales.
Skeptics argue that even best-in-class growth cannot indefinitely support such multiples. If growth slows, the multiple could compress sharply.
Yet bulls note that companies with category leadership in mission-critical SaaS often sustain premiums for much longer than expected.
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Technicals: Consolidating Near Support
Datadog closed at $126 on August 26, down from a 52-week high of $170. Support sits near $120, while resistance has formed around $143.
Shares remain above the 200-day moving average, currently near $123, but momentum has weakened.
Recent chart action included a bullish engulfing pattern in late August, signaling potential for a short-term reversal.
RSI levels are approaching oversold territory, creating room for a bounce. Still, volume trends suggest that investors remain cautious, and volatility is expected.
Action: Traders may look for entries near $120 with a short-term upside target of $140, while long-term investors can use the current weakness to scale in gradually. |
Institutional and Analyst Sentiment
Analyst opinions are divided. Zacks rates Datadog a Hold, reflecting valuation concerns.
At the same time, 38 Wall Street analysts maintain Buy ratings with an average target of $139, suggesting modest upside.
Targets range from $115 to $200, underscoring uncertainty.
Piper Sandler, DA Davidson, and Scotiabank are among the more constructive firms, highlighting Datadog’s market share gains.
Others, including Mizuho, are cautious due to mixed fundamentals and high multiples.
Institutional flows also reflect divergence. Some large funds have trimmed their exposure, while extra-large players have increased their modest inflows.
Retail participation remains limited, reflecting a wait-and-see stance from smaller investors.
Sector Tailwinds: SaaS Demand Remains Strong
The broader software sector is benefiting from structural shifts.
Rivian and Volkswagen’s joint venture in software-defined vehicles illustrates new vertical demand for SaaS monitoring.
At the same time, U.S. restrictions on chip design software highlight geopolitical risks, while also emphasizing the importance of secure and resilient cloud services.
Datadog is well positioned to serve customers facing these challenges.
Its security products complement observability tools, making it a one-stop platform for enterprises seeking visibility and protection in dynamic environments.
Risks to Watch
Valuation compression: With a price-to-earnings ratio of over 60 times, the stock could experience multiple contraction if growth slows.
Competition: Rivals like Dynatrace, Splunk, and New Relic are investing aggressively.
Macro sensitivity: Enterprise IT budgets could tighten if economic conditions worsen.
Volatility: Datadog’s beta is above 1.3, indicating that it tends to fluctuate more significantly than the market.
Geopolitical risk: Export restrictions and policy changes may indirectly impact demand.
Final Word: A Leader With a Price Tag
Datadog is a proven growth story in observability, with strong fundamentals, sticky customer relationships, and expanding market opportunities.
Its premium valuation is the biggest hurdle, but if revenue growth continues above 20% and new product adoption remains strong, the premium may prove justified.
For investors seeking exposure to cloud infrastructure and SaaS adoption, Datadog offers one of the clearest plays.
The volatility and valuation risks are real, but the long-term opportunity is equally compelling.
Action Recap |
That's our coverage for today; thanks for reading! Reply to this email with feedback or any tech stocks you want me to check out.
Best Regards,
—Noah Zelvis
Tech Stock Insider