In case you’re a software program firm with a flimsy worth proposition, then AI is a risk as a result of it permits others to construct one thing higher and deploy it shortly. However for corporations which have enterprise fashions that course of a lot of proprietary knowledge in an automatic trend, AI permits them to do all types of thrilling issues with it. That’s the place Datadog $DDOG sits with their observability platform that’s clearly benefiting from the expansion of synthetic intelligence. Final time we checked in with Datadog, they had been projecting full-year income of about $3.2 billion, a rise of “simply” 18% to 19% year-over-year. As an alternative, they delivered 2025 income development of 28%.
Now they’re telling us once more to anticipate 19% for the approaching yr which might nonetheless be spectacular given they’re ranging from a bigger base. Maybe what’s most notable is {that a} significant quantity of that development shock is alleged to be coming from synthetic intelligence.
Datadog Has Room For Development
Of their newest name, Datadog mentioned they “proceed to imagine income is a greater indication of our enterprise traits than billing and RPO,” and we couldn’t agree extra. For a SaaS firm, growing revenues comes from promoting extra to current shoppers and including new shoppers. Regardless of having 32,700 prospects Datadog nonetheless describes new brand additions as “very sturdy” with simply 7% of the full variety of potential shoppers captured. Much more spectacular are the growing income commitments being made by their largest prospects.
We’re not given common contract period, however that’s usually one to 3 years for SaaS companies. So when Datadog says, “we signed 18 offers over $10 million in TCV this quarter, of which 2 had been over $100 million and 1 was an 8-figure land with a number one AI mannequin firm” that suggests sturdy demand for the providers they supply which is a number one indicator for income development.
It additionally implies there’s a great deal of upside from current shoppers alone, particularly the bigger ones. Round 90% of Datadog’s revenues come from shoppers spending greater than $100,000 a yr which suggests they’re firmly entrenched in enterprise gross sales versus folks paying for a number of seats with a bank card. And get this. Whereas 48% of the Fortune 500 are prospects, they’re nonetheless spending below $500,000 on the median which suggests appreciable upside from current massive accounts.
Whereas Datadog’s web retention fee is an elusive quantity to seize, the newest earnings name talks about how “income retention share was about 120%, much like final quarter.” That’s thought-about common for a top quality SaaS agency, and it’s seemingly a great chunk of that new spend could be (or will definitely quickly be, based on administration) from upselling current prospects a lot of cool AI stuff.
Datadog for AI and AI for Datadog
As we mentioned in our “AI vs. SaaS” video, there isn’t a higher time to be promoting AI software program to C-level sorts who need to inform shareholders they’re “doing AI.” So it’s not sufficient to be speaking about agentic AI options you’re engaged on (cough, UiPath, cough). You have to be really promoting AI performance to shoppers. Bonus factors when you develop and deploy one thing most AI corporations want. Datadog has managed to do each.
“AI for Datadog” is in regards to the AI-powered options they’re constructing and deploying which ought to end in extra revenues from current shoppers. They speak in regards to the Bits AI Dev agent, which detects code-level points and generates fixes in manufacturing context. Moreover, their Bits AI Safety Agent will help launch and monitor a repair, offering advanced troubleshooting as wanted. This bot can autonomously conduct investigations and ship suggestions based mostly on Security Information and Event Management (SIEM) alerts, that are merely alerts that Datadog’s software program spits out when it encounters anomalies in a buyer’s knowledge exhaust.
“Datadog for AI” is the distinctive product providing they promote to AI corporations, particularly “capabilities that ship end-to-end observability and safety throughout the AI stack.” Final quarter they landed “one of many largest AI foundational mannequin corporations” which had a fragmented observability stack comprised of greater than 5 open supply, business, and in-house observability instruments. All of these patched-together options had been introduced below the unified Datadog platform which suggests the client is now extra productive and may scale with ease.
Datadog says they’ve 650 “AI-native prospects” that are mainly AI startups that kind a cohort which is considerably outpacing the remainder of their enterprise. Round 19 of those prospects are spending $1 million or extra yearly with Datadog and “14 of the highest 20 AI-native corporations are Datadog prospects” which means most notable AI corporations are utilizing their resolution as they scale. And guess who has extra money than they know what to do with proper now? That’s proper, AI corporations, which now account for 11% of whole revenues and rising shortly.
Datadog has additionally developed their very own small observability LLM internally referred to as Toto which was educated on 750 billion knowledge factors distinctive to the corporate. It price $750K to coach in comparison with billions for main frontier AI corporations and is being fed trillions of recent occasions per hour.
A software-as-a–service (SaaS) firm for which AI is a chance, not a risk, must command a value premium. Even with all of the AI pleasure within the air, Datadog has a valuation that’s wealthy however not extreme. And currently, it’s been on the decline which is nice information for individuals who like shopping for high quality SaaS names at discounted costs.
Datadog’s Valuation Reverts to the Imply
Final yr, we commented on Datadog’s wealthy valuation, with a median trailing four-quarter simple valuation ratio (SVR) of roughly 16. That common has now fallen to a extra modest 14, with their present SVR clocking in at simply 11.5. Which means that regardless of Datadog’s spectacular execution and persistently sturdy income development, shares don’t seem costly relative to previous valuations. In actual fact, they’ve solely gotten cheaper. Why?
The AI sword has two edges. Whereas Datadog is seeing wholesome demand for their very own AI instruments, additionally they face their fair proportion of headwinds from competing AI corporations. The trio of Nice Danes within the room can be the hyperscalers, particularly Amazon Web Services (AWS), Google Cloud, and Microsoft Azure. These three corporations have begun to implement their very own observability and AI monitoring instruments onto their platforms. For instance, AWS gives Amazon CloudWatch which comes built-in to over 120 AWS providers. With CloudWatch, you possibly can acquire and combination varied knowledge metrics and analyze them for anomalies – mainly precisely what Datadog’s flagship software program does. Azure Monitor and Google Cloud Operations Suite present comparable providers.
So as to compete with the massive canine, Datadog wants to point out that its third-party software program can add worth above and past these built-in instruments. Our intern Tidder polled the developer neighborhood and located that almost all choose Datadog over CloudWatch due to its ease of use and enhanced options equivalent to customized “well being checks.” Datadog additionally has the additional benefit of supporting “multi-cloud” operations, which means it may be used on AWS, Azure, and Google Cloud concurrently. That bodes properly since most corporations are transferring in direction of using a number of clouds.
There’s additionally the “AI eats software program” narrative that’s been operating rampant currently – mainly that AI brokers will slowly begin to change people. This can trigger enterprises to drop seats from their software program subscriptions, or abandon them fully in favor of superior AI fashions like Anthropic’s Claude. Whereas Datadog is essentially utilization based mostly, not seat based mostly, it’s not completely shielded from disruption fears. For instance, Datadog is utilizing AI to spotlight points and recommend fixes in code. Why can’t any AI agent – not simply those being constructed by Datadog – repair these points proactively?
We will speculate till the Datacows come dwelling, however till we see weak point in Datadog’s buyer depend and income development, what handle says appears credible. AI is extra of a bonus than a risk.
Conclusion
With all of the concern mongering round AI changing SaaS platforms, Datadog stands out as an organization which occupies a place of power. Their highly-automated platform pulls knowledge from over 1,000 integrations and compiles it right into a single supply of reality. Trillions of information factors are added every hour after which fed to AI algorithms to make sense of. Now they’re transferring in direction of brokers that take motion when wanted. The addition of safety of their stack creates stickiness and lends itself to vendor consolidation initiatives.
In case you’re an AI-native firm of any significance, it’s extra seemingly than not you utilize Datadog for all the things from observability to safety. As at all times, the proof is within the income development, and Datadog has that in spades. Let’s hope they will blow this yr’s numbers out of the water and maintain the acceleration going.
