1 Glorious Growth Stock to Buy Hand Over Fist in May, According to Wall Street

Datadog (NASDAQ: DDOG) developed a cloud observability platform that monitors digital infrastructure for tens of thousands of businesses and alerts them to technical issues before their customers are affected. The company has now also launched a portfolio of observability tools specifically for the artificial intelligence (AI) industry over the past couple of years, and they're experiencing red-hot demand.

In fact, Datadog released its operating results for the first quarter on May 7, which revealed accelerating revenue growth and a significant increase to management's full-year guidance. Datadog stock has rocketed higher by 40% since the report, and it's currently trading at a record high.

But more upside might be on the horizon, because the overwhelming majority of the analysts tracked by The Wall Street Journal think Datadog stock is still a buy. Here's why I think their bullish consensus is justified.

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A growing portfolio of products for AI customers

Datadog's cloud observability customers include businesses operating in retail, entertainment, manufacturing, financial services, and more. AI adoption is spreading across all of those industries, enabling Datadog to extract more revenue from its existing customer base as it expands its product portfolio in this space.

In mid-2024, Datadog launched a product called LLM Observability, which helps developers identify technical issues, track costs, and monitor output quality when building large language models (LLMs). These models sit at the foundation of customer-facing AI chatbots and agents, so they must produce accurate outputs, or else the business could suffer reputational damage.

Last month, Datadog released a new product called GPU Monitoring. Graphics processing units (GPUs) are the main chips used when developing and deploying AI software, and this tool tracks usage and costs to help businesses stay on budget. It also proactively identifies unhealthy GPUs, so they can be replaced immediately to minimize potential downtime.

Datadog said 6,500 of its 33,200 customers were using at least one of its AI integrations at the end of the first quarter, a 62% increase from the year-ago period. Plus, the number of Model Context Protocol server calls quadrupled from the previous quarter, just three months earlier. In simple terms, that means customers dramatically increased their usage of Datadog's AI products during the first quarter.

Accelerating revenue growth

Datadog generated $1 billion in total revenue during the first quarter, which blew away management's forecast of $956 million. It represented a 32% year-over-year increase, marking the second consecutive quarter of accelerating growth. This performance highlights the company's AI-led momentum.

The first-quarter result was so strong that Datadog significantly increased the midpoint of its 2026 revenue guidance from $4.08 billion to $4.32 billion, which is a key reason its stock rocketed higher over the past week.

Datadog also had a great quarter at the bottom line. Its net income under generally accepted accounting principles (GAAP) more than doubled from the year-ago period to $52.5 million. Furthermore, after excluding one-off and non-cash expenses, the company delivered an adjusted (non-GAAP) profit of $218.1 million, a 30% climb.

The company has a history of producing losses at the bottom line while prioritizing revenue growth, but it appears to have struck a healthy balance thanks to the incredible organic demand for its AI products.

Wall Street is still bullish on Datadog stock

The Wall Street Journal tracks 50 analysts who cover Datadog stock, and 40 of them have given it a buy rating. Six others are in the bullish camp, while three recommend holding. Just one analyst recommends selling.

The analysts have an average price target of $223.30, which suggests the stock could rise by another 10% over the next 12 months or so. The Street-high target of $320 points to a much greater potential upside of 58%, but the company will have to continue producing strong quarterly earnings reports to hit that level in the near term.

Based on Datadog's trailing-12-month revenue, its price-to-sales (P/S) ratio is currently 20, which is above its three-year average of 16.8. This is a unique company with few if any publicly listed competitors, but its stock is far more expensive than a basket of other cloud and AI software stocks, including Microsoft, Alphabet, Snowflake, and Atlassian.

DDOG PS Ratio data by YCharts

As I said, those companies aren't perfect comparisons to Datadog, but they are quality businesses with a formidable presence in the AI space. Given its relatively high P/S ratio, investors who buy Datadog stock should probably aim to hold it for a long-term period of at least three years, which will give the company time to grow into its valuation and maximize the chances of earning a positive return.

Anthony Di Pizio has positions in Atlassian. The Motley Fool has positions in and recommends Alphabet, Atlassian, Datadog, Microsoft, and Snowflake. The Motley Fool has a disclosure policy.