Why Datadog’s recent returns may have investors reassessing the stock

Datadog (DDOG) has lagged recently, with the share price showing a 4.1% decline over the past day and deeper negative returns over the past week, month, and past 3 months.

At the same time, the company reports annual revenue of US$3.43b and net income of US$107.74m, with both revenue and net income growth reported on an annual basis. This gives investors concrete financial figures to weigh against recent price moves.

That recent 4.1% one day share price decline to US$115.66 comes on top of weaker momentum over the past quarter. The 1 year total shareholder return of a 3.33% decline contrasts with a still positive 3 year total shareholder return of 50.85%, hinting that sentiment has cooled after a stronger multi year run.

If Datadog’s pullback has you scanning the broader cloud and software space, it could be a good time to see what else is out there among 34 AI infrastructure stocks as another way to look for opportunity.

With Datadog shares down over the past year, but revenue at US$3.43b and net income at US$107.74m, the key question is whether today’s price reflects a bargain or if the market is already assigning value to potential future growth.

Most Popular Narrative: 44.5% Undervalued

Datadog’s most followed narrative points to a fair value of about $208.49 per share, well above the last close at $115.66. This sets up a clear valuation gap for investors to assess.

Ongoing product innovation (e.g., autonomous AI agents, enhanced security modules, expanded log and data observability) is increasing platform breadth and relevance, providing cross-selling opportunities and driving higher average revenue per user and net retention rate, which in turn improves recurring revenue predictability and gross margins.

Curious how this product expansion translates into that higher fair value estimate? The narrative refers to compounded revenue gains, firmer margins, and a rich future profit multiple tied to Datadog’s role in AI heavy workloads. The exact path, and the trade off it assumes, only becomes clear when you see the full set of projections behind that $208.49 figure.

Result: Fair Value of $208.49 (UNDERVALUED)

However, you also need to weigh risks like pricing pressure from rivals such as Chronosphere and rising operating costs, which could squeeze margins if growth slows.

Another View: High P/S Puts Pressure On The Undervaluation Story

Those fair value estimates of about $208 per share line up with our own model, which suggests Datadog is trading 35.8% below its estimated future cash flow value of $180.29. But the market is also saying something else when you look at the P/S ratio.

Datadog trades on a P/S of 11.9x, compared with 3.5x for the wider US Software group and 7.7x for peers, while its fair ratio is 11.2x. That gap points to a rich current pricing multiple even with a DCF signal of undervaluation. The key question is which story matters more for you right now.

Next Steps

If this combination of upside potential and real concerns leaves you undecided, it may be worth acting promptly and reviewing the full picture for yourself with 2 key rewards and 2 important warning signs.

Ready to scout your next ideas?

If Datadog is on your radar, do not stop there. A few minutes in the screener can surface fresh names you might regret missing later.

• Target stability first by checking companies screened for resilient balance sheets and earnings quality through our solid balance sheet and fundamentals stocks screener (43 results).
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.