Wells Fargo lifts bullish outlook on Datadog amid AI-driven cloud security surge

Wells Fargo has initiated coverage on Datadog with an Overweight rating and a price target of $190, citing its strategic focus on AI-native solutions and robust revenue growth prospects driven by increasing enterprise demand for cloud monitoring and security tools.

Wells Fargo has initiated coverage on Datadog Inc (DDOG) with a confident Overweight rating, setting a price target of $190, highlighting the cloud-native company’s strong position in the rapidly evolving technology sector. This firm valuation stems largely from Datadog’s strategic focus on AI-native offerings, which have notably contributed over $100 million to its current run-rate revenue. Analysts from Wells Fargo project that, notwithstanding potential risks such as OpenAI’s departure from its AI partnerships, other AI-native applications will fill the gap, resulting in AI-related revenues potentially exceeding $700 million by 2028. This positive outlook reflects a broader market trend where enterprises increasingly invest in observability solutions that ensure operational stability and efficiency across complex IT infrastructures.

Datadog specialises in software-as-a-service (SaaS) products that allow clients to monitor and analyse an entire IT ecosystem — from servers and applications to custom Python scripts — in real time. The platform’s capacity to ingest and process large volumes of machine-generated data enables businesses to maintain optimal uptime and application performance. With a market capitalisation around $51.65 billion, Datadog operates in the competitive software industry but has carved a niche by focusing on cloud monitoring and security solutions, backed by continuous innovation such as its recent acquisition of Eppo, which enhances its AI and analytics capabilities through experimentation and feature flagging tools.

Financially, Datadog demonstrates robust health. The company maintains a strong liquidity position with a current ratio of 3.43 and a manageable debt-to-equity ratio of 0.4. These figures underline solid short-term financial stability and responsible long-term financial leverage. Its Altman Z-Score of 12.45 further signals strong financial stability, with a Beneish M-Score indicating that the company shows no signs of earnings manipulation. However, some caution may be warranted due to insider selling activities observed over recent months. On the valuation front, Datadog trades at near-historical highs, reflecting optimistic market sentiment confirmed by significant institutional ownership levels exceeding 79%.

Recent quarters have seen Datadog outperform expectations, especially as AI and cloud-driven demand for monitoring and security intensifies. In the first quarter of 2025, the company reported revenue of $761.6 million, beating forecasts, alongside a 25% year-over-year growth. High-value customer accounts, defined by annual recurring revenue upwards of $100,000, increased by 13%, underscoring strong client retention and growth. These positive results prompted Datadog to raise its full-year 2025 revenue forecast to between $3.22 billion and $3.24 billion, surpassing previous estimates and analysts’ consensus. The company attributes this growth to new product offerings such as App Builder and On-Call, combined with its robust security monitoring services and expanded AI analytics.

Furthermore, Datadog’s outlook remains optimistic, as indicated by its recent guidance for the third quarter of 2025, with expected revenues between $847 million and $851 million, again exceeding analysts’ estimates. The company also anticipates adjusted earnings per share to range from 44 to 46 cents, further evidencing ongoing profitability amid growing enterprise adoption of AI and cloud technologies. Datadog’s platform serves marquee clients including Samsung, NASDAQ, and Comcast, firms that prioritise reliability and security in fast-evolving cloud environments. These developments have continually led to share price gains, reflecting investor confidence in Datadog’s growth narrative.

Nonetheless, this growth is not without challenges. Earlier in 2025, Datadog revised some forecasts downward, citing weaker-than-expected spending on cloud security amid economic uncertainties and intensified competition from rivals like Dynatrace, who are leveraging AI advancements aggressively. This led to a temporary share price dip, illustrating the volatile nature of the technology sector where rapid innovation and shifting customer priorities can impact near-term results. Still, subsequent quarters have seen a rebound, driven by renewed client investment and product innovation, particularly within AI-driven cybersecurity offerings that are now a core focus.

Indeed, rising demand for AI-backed cloud security products has recently prompted Datadog to raise its annual revenue and profit forecasts once again. Its full-year revenue projection now stands at approximately $2.66 billion, above previous guidance, with earnings per share expected in the range of $1.75 to $1.77. This increase was supported by a strong quarterly performance, with revenue of $690 million and adjusted earnings surpassing expectations, fueled by an expanding customer base deploying AI applications and the overarching trend of cloud migration.

In summary, Wells Fargo’s bullish stance on Datadog highlights the company’s well-positioned growth driven by AI-native solutions and cloud observability expertise. Verified by solid recent financial results and positive future revenue projections, Datadog remains an attractive prospect in the tech sector. However, investors should remain mindful of potential risks stemming from competitive pressures, market volatility, and the inherent uncertainties in rapidly evolving technology stacks.

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Source: Noah Wire Services