1 AI Super Stock Is Starting to Rebound, but Shares Still Look Cheap

The rise of artificial intelligence (AI) is generating plenty of wealth on Wall Street -- and the winners won't be limited to just semiconductor stocks like Nvidia. Tech stocks across several subsectors will benefit, too.

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Let's take a look at one such stock, Datadog (NASDAQ: DDOG).

Image source: Getty Images.

Datadog stock is gaining steam

Between 2019 and 2021, Datadog was one of the hottest names in the stock market. Shares advanced by more than 400% in only three years. However, as the stock market soured on tech stocks and speculative companies in 2022, Datadog shares plummeted. All told, the shares cratered by 68%, erasing the majority of their earlier gains. As of this writing, Datadog stock remains more than 35% off of the all-time high it touched in late 2021.

Yet sentiment regarding the stock appears to have shifted. Datadog, which provides cloud monitoring services for enterprises, now boasts strong ratings from the analyst community.

According to data compiled by Yahoo! Finance, there are 46 analysts covering Datadog. Of those, 10 rate it as a strong buy, 28 rate it a buy, and eight call it a hold. None of them rate it a sell or strong sell.

Moreover, the average 12-month price target for Datadog shares is nearly $139. That's about 9% higher than the stock trades as of this writing.

How the AI revolution is helping Datadog

Datadog's business model is to sell monitoring services to organizations with significant cloud assets. This type of monitoring is critical to enterprises today, as operational downtime can result in serious consequences, including lost revenue, customer dissatisfaction, and even legal action. It already serves tens of thousands of clients across a range of industries, including e-commerce, gaming, and finance.

While the type of monitoring that Datadog offers isn't new, what it is monitoring is changing. New large language models (LLMs) powered by AI algorithms have become much more important to organizations.

Use of these models is rapidly spreading into the day-to-day operations of countless organizations. As this happens, their performance must be monitored, too. That has created a new source of revenue for Datadog, which is helping boost its growth.

Datadog's fundamentals are getting an AI shot in the arm

Consider the company's first-quarter results. Datadog noted that about 8.5% of its total revenue came from AI-native customers. That was up from 3.5% one year earlier -- showing meaningful growth for this new source of revenue.

Management also raised its revenue guidance for the year by about $40 million, or 1%, on the back of this fast-growing new source of sales.

Ultimately, these figures aren't game changers for Datadog, but they demonstrate that the AI revolution is benefiting the company. If it can continue to deliver on its higher guidance -- or even surpass it -- the stock should respond positively.

In part, that's because Datadog's valuation remains near multiyear lows.

Datadog's valuation looks reasonable

Though Datadog's stock price has recovered significantly from its 2022 low point, its valuation -- as measured by its price-to-sales (P/S) ratio -- remains near the bottom of its range.

DDOG PS Ratio data by YCharts.

As of this writing, Datadog shares trade at a P/S ratio of around 16. That's well below the peak levels above 60 that it reached in 2020 and 2021. It's also far below the stock's average of 28.

Granted, a P/S ratio of 16 is still high compared to many stocks -- even within the tech sector. However, for long-term investors who want to establish a position in Datadog shares, it should be comforting that it doesn't appear to be overvalued.

The stock appears to be rebounding after a steep decline. The AI revolution is playing a role in that comeback, and the analyst community is moderately bullish on the company's prospects. Finally, its current valuation is well below its long-term average. Overall, that suggests that this could be a good time for long-term investors to buy.

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Jake Lerch has positions in Nvidia. The Motley Fool has positions in and recommends Datadog and Nvidia. The Motley Fool has a disclosure policy.