Should 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 plenty of proprietary information in an automatic trend, AI permits them to do every kind 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 have been projecting full-year income of about $3.2 billion, a rise of “simply” 18% to 19% year-over-year. As a substitute, they delivered 2025 income development of 28%.
Now they’re telling us once more to anticipate 19% for the approaching 12 months 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 claimed to be coming from synthetic intelligence.
Datadog Has Room For Progress
Of their newest name, Datadog mentioned they “proceed to consider income is a greater indication of our enterprise traits than billing and RPO,” and we couldn’t agree extra. For a SaaS firm, rising revenues comes from promoting extra to present shoppers and including new shoppers. Regardless of having 32,700 clients Datadog nonetheless describes new brand additions as “very sturdy” with simply 7% of the entire variety of potential shoppers captured. Much more spectacular are the rising income commitments being made by their largest clients.
We’re not given common contract period, however that’s sometimes one to a few years for SaaS corporations. So when Datadog says, “we signed 18 offers over $10 million in TCV this quarter, of which 2 have been over $100 million and 1 was an 8-figure land with a number one AI mannequin firm” that means 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 present shoppers alone, particularly the bigger ones. Round 90% of Datadog’s revenues come from shoppers spending greater than $100,000 a 12 months which suggests they’re firmly entrenched in enterprise gross sales versus folks paying for just a few seats with a bank card. And get this. Whereas 48% of the Fortune 500 are clients, they’re nonetheless spending underneath $500,000 on the median which suggests appreciable upside from present massive accounts.
Whereas Datadog’s internet 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 probably chunk of that new spend is likely to be (or will definitely quickly be, in line with administration) from upselling present clients plenty of cool AI stuff.
Datadog for AI and AI for Datadog
As we mentioned in our “AI vs. SaaS” video, there is no such thing as a higher time to be promoting AI software program to C-level sorts who wish 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 could be truly 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 present 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 might help launch and monitor a repair, offering advanced troubleshooting as wanted. This bot can autonomously conduct investigations and ship suggestions primarily based on Security Information and Event Management (SIEM) indicators, that are merely alerts that Datadog’s software program spits out when it encounters anomalies in a buyer’s information 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 have been introduced underneath the unified Datadog platform which suggests the shopper is now extra productive and might scale with ease.
Datadog says they’ve 650 “AI-native clients” that are principally AI startups that kind a cohort which is considerably outpacing the remainder of their enterprise. Round 19 of those clients are spending $1 million or extra yearly with Datadog and “14 of the highest 20 AI-native corporations are Datadog clients” which means most notable AI corporations are utilizing their answer 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 known as Toto which was skilled on 750 billion information 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 latest occasions per hour.
A software-as-a–service (SaaS) firm for which AI is a chance, not a risk, must command a worth 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 12 months, 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. The truth is, 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 gather and mixture varied information metrics and analyze them for anomalies – principally precisely what Datadog’s flagship software program does. Azure Monitor and Google Cloud Operations Suite present comparable providers.
As a way to compete with the large canines, Datadog wants to indicate 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 want Datadog over CloudWatch because of its ease of use and enhanced options similar to customized “well being checks.” Datadog additionally has the additional advantage of supporting “multi-cloud” operations, that means it may be used on AWS, Azure, and Google Cloud concurrently. That bodes effectively since most corporations are shifting in direction of using a number of clouds.
There’s additionally the “AI eats software program” narrative that’s been operating rampant currently – principally that AI brokers will slowly begin to substitute 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 primarily based, not seat primarily based, it’s not completely shielded from disruption fears. For instance, Datadog is utilizing AI to spotlight points and counsel fixes in code. Why can’t any AI agent – not simply those being constructed by Datadog – repair these points proactively?
We are able to speculate till the Datacows come house, however till we see weak spot 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 worry mongering round AI changing SaaS platforms, Datadog stands out as an organization which occupies a place of energy. Their highly-automated platform pulls information from over 1,000 integrations and compiles it right into a single supply of fact. Trillions of information factors are added every hour after which fed to AI algorithms to make sense of. Now they’re shifting 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.
Should you’re an AI-native firm of any significance, it’s extra probably than not you utilize Datadog for the whole lot from observability to safety. As all the time, the proof is within the income development, and Datadog has that in spades. Let’s hope they’ll blow this 12 months’s numbers out of the water and hold the acceleration going.
