Why Datadog Stock Skyrocketed on Thursday

Key Points

• Datadog is set to join the S&P 500 next week.

• The cloud monitoring and security specialist is already at the top of its field.

• Artificial intelligence (AI) represents another vast opportunity for Datadog.

Shares of Datadog (NASDAQ: DDOG) charged sharply higher Thursday. As of 10:53 a.m. ET, the stock was up 13.1%.

The catalyst that sent the cloud monitoring, analytics, and security company soaring was the revelation that the stock will be joining the most widely followed stock market index in the U.S.

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An important nod

In a press release that dropped after the market closed on Wednesday, S&P Dow Jones Indices announced that Datadog would be added to the S&P 500 (SNPINDEX: ^GSPC) before the start of trading on July 9. The stock will be replacing Juniper Networks on the storied index, as the company was recently acquired by Hewlett Packard Enterprise.

This represents an important validation for Datadog, as many in the investing community had expected either AppLovin or Robinhood Markets to make the cut.

The S&P 500 is the most widely followed benchmark in the U.S. and is regarded as the most reliable benchmark of stock market performance in the country. To be admitted to the index, companies must meet important market cap, liquidity, and profitability criteria. The fact that Datadog was chosen over these other investor-favorite stocks suggests the company has earned the respect of Wall Street.

It's well known that stocks that join an index like the S&P often experience the "index effect," a short-term price bump, as index funds and exchange-traded funds that track the index buy shares of the stock to match its composition. However, history shows that the impact is short-lived, and more important considerations like revenue growth, profits, and cash generation take center stage.

What's next for Datadog?

Datadog is at the top of its game, as evidenced by its selection as a Leader in the "2024 Magic Quadrant" by Gartner for observability platforms. The company pivoted quickly to include tools to monitor large language models (LLMs) and other artificial intelligence (AI) systems. This move was prescient, as these tools currently represent roughly 9% of annual recurring revenue.

Given the company's growth trajectory and AI tailwinds, investors might want to consider taking Datadog for a walk.

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Danny Vena has positions in Datadog. The Motley Fool has positions in and recommends AppLovin and Datadog. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.