Key Points
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Datadog made significant improvements to its business with AI, resulting in meaningful Q1 revenue acceleration.
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Full-year guidance suggests that current growth will moderate closer to last year’s levels, which isn’t good for the AI growth narrative.
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Datadog’s valuation has soared, and it now trades above 25 times sales.
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Datadog (NASDAQ: DDOG) is riding tailwinds that have propelled the cybersecurity industry. As artificial intelligence (AI) advances, companies have more data points to protect from hackers. The company’s cloud-scale infrastructure also makes it easier to monitor and secure its cloud platforms. That has become critical in the age of AI.
Those factors have been enough to almost double Datadog’s stock price this year. However, a high valuation and a history of several 30% drawdowns over the past five years suggest caution is warranted now.
Datadog’s valuation demands perfection
Datadog’s fundamentals have not kept up with the stock’s momentum. A 32% year-over-year increase in Q1 revenue is much lower than the stock’s year-to-date gains. Growth has been picking up in recent quarters, but the overall trend is still deceleration.
Datadog’s revenue has a 41.5% compound annual growth rate (CAGR) over the past five years, suggesting growth is slowing. Artificial intelligence can reinvigorate long-term growth, especially through GPU monitoring, which could become an essential feature for many data centers. However, the current valuation requires perfection.
Datadog trades above 25 times sales. It’s a major jump from the 15x sales valuation the cloud company had at the end of 2025. The stock’s P/E ratio also sits above 650 and has surged by roughly 50% since the start of the year. It is a historically high valuation for Datadog, and its previous vulnerability to sharp corrections implies another sharp drop is possible.
Revenue must accelerate a lot more to justify buying Datadog stock
Although the five-year revenue CAGR shows decelerating revenue, Datadog did deliver 32% year-over-year revenue growth in Q1. That’s higher than the 29% growth rate in Q4 2025 or the 25% growth rate in Q1 2025.
Amazon and Alphabet have both delivered meaningful revenue acceleration for their cloud platforms. Some of those new customers will need Datadog to monitor their cloud platforms, and existing Datadog customers may have to upgrade their plans due to soaring cloud usage.
This sets a precedent for cloud providers like Datadog, but Q2 guidance does not suggest revenue acceleration will continue. Datadog is projecting $1.075 billion in sales at the midpoint, which would only be a 30% year-over-year growth rate. Full-year guidance establishes a $4.32 billion midpoint, which implies 26% year-over-year revenue growth.
Guidance currently makes the accelerated growth in Q1 look like a fluke, since sales are expected to moderate back to levels investors saw last year. That’s not desirable, given the stock’s valuation and how artificial intelligence has produced meaningful, prolonged revenue acceleration for many companies.
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Marc Guberti has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Alphabet, Amazon, and Datadog. The Motley Fool has a disclosure policy.
