1 Super Stock Down 44% You'll Wish You'd Bought on the Dip, According to Wall Street

Cloud computing is the revolutionary technology that provides businesses with a cost-effective way to shift their operations online. But managing digital infrastructure can be tricky, because websites and online services need to be available 24/7 for customers and employees. That's where Datadog (NASDAQ: DDOG) comes in -- it developed a cloud monitoring platform which helps enterprises minimize downtime and, therefore, lost income.

Datadog stock is trading 44% below its record high, which was set during the tech frenzy in 2021. It was unquestionably overvalued then, but the company never stopped expanding, so its stock is actually starting to look attractive at the current level.

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Wall Street appears to agree. The Wall Street Journal tracks 46 analysts who cover Datadog stock, and most of them have assigned it the highest possible buy rating, with not a single one recommending selling. Here's why investors might want to buy the dip.

Image source: Getty Images.

Datadog is moving into AI

Datadog had 30,500 customers at the end of the 2025 first quarter (ended March 31), and they operate across a variety of industries including retail, financial services, healthcare, gaming, technology, and more. Cloud monitoring has become essential for all of them, but they use it in unique ways depending on the nature of their business.

A retailer, for instance, might use Datadog to monitor its website infrastructure around the clock. It can immediately tell the owner if a certain group of customers is having trouble accessing the online store, so the technical issue can be fixed before it leads to a drop in sales. Similarly, Sony's Playstation Network uses Datadog to monitor infrastructure at all three of its main operations centers in Tokyo, San Diego, and San Francisco, allowing them to pool their resources to resolve outages more quickly.

Datadog is now using its expertise to move into the artificial intelligence (AI) industry. It launched a monitoring tool for large language models (LLMs) last year, which helps developers track costs, troubleshoot technical issues, and even evaluate the quality of the outputs produced by each model, so they can make timely adjustments. During Q1, Datadog said the number of customers who were using the LLM Observability product more than doubled compared to six months earlier.

The company also launched a monitoring product for businesses that use ready-made LLMs from OpenAI to deploy AI software, instead of developing their own models. The tool helps them track their consumption across the organization, so they can allocate resources more efficiently and create more accurate budgets.

Overall, Datadog said 4,000 of its 30,500 customers were using at least one of its AI products in Q1. That number doubled compared to the year-ago period.

Rapid revenue growth, led by AI

Datadog generated $762 million in total revenue during Q1 2025. That represented year-over-year growth of 25%, and it was above the high end of management's guidance of $741 million. Chief Financial Officer David Obstler said AI-native customers accounted for 8.5% of the company's total revenue during the quarter. That might not sound like much, but it was more than double the 3.5% contribution it made in the year-ago period.

The first-quarter result was so strong that management increased its full-year guidance by $40 million. Datadog is now expected to bring in $3.235 billion in total revenue during 2025 (at the high end of the range), up from $3.195 billion previously.

Datadog remained profitable during the quarter despite investing heavily in growth. Its total operating costs grew by 26% year over year to $616 million, led by research and development spending, which accounted for more than half of that total. The company still delivered $0.07 in earnings per share (EPS) on a GAAP (generally accepted accounting principles) basis -- but that was down by 46% from the year-ago period.

However, after stripping out one-off and non-cash expenses, Datadog delivered $0.60 in EPS on a non-GAAP basis. That was flat year over year, but it was significantly above the high end of management's forecast of $0.43.

Wall Street is bullish on Datadog stock

The Wall Street Journal tracks 46 analysts who cover Datadog stock, and 29 of them have given it the highest possible buy rating. Eight others are in the overweight (bullish) camp, and the remaining nine recommend holding. Not a single analyst recommends selling.

They have an average price target of $137.66 for the stock, which implies a potential upside of 27% over the next 12 to 18 months. However, the Street-high target of $200 suggests the stock could surge by 85% instead.

Datadog was trading at an eyewatering price-to-sales (P/S) ratio of over 60 in 2021, which was unsustainable. But the 44% decline in its stock, combined with the company's consistent revenue growth since then, have pushed its P/S ratio down to a more reasonable level of 13.8. That's nearly the cheapest it's been in five years, and is a 54% discount to its average P/S ratio of 30.2 over the same period.

DDOG PS Ratio data by YCharts.

Datadog values its addressable market at $53 billion right now in the observability space alone, and expects it to grow at a compound annual rate of 11% until 2028. The company has barely scratched the surface of that opportunity based on its current revenue, which might be why Wall Street is so bullish about the potential of its stock.

Plus, the AI revolution is still in its infancy, and it could expand Datadog's opportunity even further over the long term. As a result, it might be a great time to buy the stock considering its current valuation, especially for patient investors who are willing to hold it for the long run.

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Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Datadog. The Motley Fool has a disclosure policy.