Datadog (DDOG) is back in focus for investors after a recent pullback, with the stock declining 1.6% over the past day and 3% over the past week despite strong longer term returns.

Over the past year, Datadog’s share price has been strong, with a 1 year total shareholder return of 74.9% and a 3 year total shareholder return of 138.07%. However, the recent 1 day and 7 day share price declines hint that momentum has cooled slightly following a sharp 90 day share price return of 78.29%.

If Datadog’s moves have you watching the broader trend in cloud and AI infrastructure, it could be a good moment to scan for other potential beneficiaries through our 49 AI infrastructure stocks

With Datadog shares pulling back after a powerful 90 day run, the key question is whether current prices still leave room for upside or if the recent surge means the market is already pricing in future growth?

Most Popular Narrative: 1.2% Undervalued

Based on the most followed narrative, Datadog’s fair value sits at about $225.76 compared with the latest close at $223. This puts the stock slightly below that estimate while still reflecting very high expectations.

Analysts are assuming Datadog's revenue will grow by 22.8% annually over the next 3 years.

Analysts assume that profit margins will increase from 3.7% today to 8.7% in 3 years time.

Want to see what kind of business has to be built to support this price tag? The narrative leans on rapid compounding, rising profitability and a rich future earnings multiple. Curious how those pieces fit together over the next few years?

Result: Fair Value of $225.76 (ABOUT RIGHT)

However, Datadog’s story can change quickly if growth expectations reset, or if competitors and customer cloud cost controls put more pressure on its rich earnings multiple.

Another View: Datadog Looks Expensive On Sales

Analysts see Datadog as only about 1.2% below their fair value estimate, but the picture changes when looking at sales. The stock trades on a P/S ratio of 21.6x, versus a fair ratio of 14.2x, the US Software average of 3.2x and a peer average of 9x.

That gap suggests investors are paying a sizeable premium for Datadog today, and it raises a simple question: how comfortable are you if sentiment around growth cools?

Next Steps

With mixed signals around Datadog’s valuation and expectations, it makes sense to check the underlying data yourself and consider acting before sentiment shifts again. To balance the enthusiasm and caution in this story, take a closer look at the 1 key reward and 3 important warning signs.

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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.