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Datadog (NASDAQ: DDOG) jumped 10% on Thursday after S&P Global announced the cloud observability firm would be added to the S&P 500 on July 9. This news often brings short-term inflows from index funds and ETFs, but the bigger story is whether Datadog can live up to elevated growth and valuation expectations now that it’s playing in the big leagues.
The company has executed well since coming public back in 2017, but the stock has lagged the market over the past few years.
Revenues have climbed from just over $1 billion in 2021 to nearly $2.7 billion in 2024, with analysts projecting $6.26 billion by 2029 — a 25% compound growth rate.
Free cash flow has followed suit, topping $1 billion in 2024 and projected to more than double by 2029.
That growth mindset is deeply rooted in the leadership of Olivier Pomel, Datadog’s CEO and co-founder. He runs the company with a focus on modular product expansion, with a clear standard, as he puts it, “the goal with every single product we ship is, in the end, on its own, it should be best of breed.”
Landing first with infrastructure monitoring, Datadog now sells more than 20 modules that cross-sell into the same engineering wallet. Pomel believes the platform effect compounds adoption, believing that “when you have a broad platform approach…it becomes irrational for customers not to buy everything as part of that platform.”
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Valuation Assumptions Leave Little Room for Error
The challenge for investors hasn’t been (and still isn’t) Datadog’s business momentum… It’s the stock’s valuation. After today’s spike, shares trade around $150, up significantly from recent lows, and carry a rich earnings multiple. The consensus 12-month price target from Wall Street analysts before today’s news was around $139, meaning the stock is already trading above the average estimate.
Using TIKR’s Guided Valuation Model, we forecasted potential returns for the stock using fairly aggressive assumptions: +20% annual revenue growth, +20% operating margins, and a 55x forward P/E multiple. That P/E figure is high by any historical or sector standard, and if margin improvement stalls or growth slows, the multiple could compress, and returns along with it.
With these numbers, we project a longer-term target of around $160 by year-end 2027 (implying a total return of only 7.5% from today’s price or just 2.9% annualized over 2.5 years).
On the flip side, if Datadog continues to gain share in the observability market, expands into adjacent categories, and leverages its strong cash flow to reinvest in growth, upside beyond $160 isn’t out of the question.
What Could Go Right (and What Could Go Wrong)
If Datadog executes flawlessly, the bull case plays out: sticky customers, durable growth, and operating leverage driving sustained cash generation. Continued outperformance and being a part of the S&P 500 index could also attract more institutional buyers and lift its valuation further.
But there are risks. The market for observability tools is competitive, with cloud hyperscalers and upstarts vying for share. Growth may decelerate as the company matures, and any stumble in margin expansion or sales execution could make today’s valuation look stretched.
The S&P inclusion is a vote of confidence. But the real test for investors is whether Datadog can keep justifying — and growing into — its premium price tag.
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Disclaimer:
Please note that the articles on TIKR are not intended to serve as investment or financial advice from TIKR or our content team, nor are they recommendations to buy or sell any stocks. We create our content based on TIKR Terminal’s investment data and analysts’ estimates. Our analysis might not include recent company news or important updates. TIKR has no position in any stocks mentioned. Thank you for reading, and happy investing!
