Does Datadog’s Valuation Still Make Sense After Its Recent Product Expansion?

• Wondering if Datadog is still a smart buy at today’s price, or if the big gains are already in the rearview mirror? Here is a closer look at what the current share price may be implying about its future.
• The stock has been a bit choppy lately, down 3.4% over the last week and 2.9% over the last month. It is still up 6.5% year to date and 106.7% over 3 years, even after a 6.3% slip over the past year.
• Recent headlines have focused on Datadog’s expanding role in observability and security, along with new product launches that deepen its footprint with large cloud customers. At the same time, there has been ongoing debate about whether high growth software names like Datadog can justify premium valuations as rates, risk appetite, and competition all evolve.
• On our checklist of 6 valuation tests, Datadog scores a 3/6. This suggests it looks undervalued on some measures but still demanding on others. We will walk through those approaches before finishing with a different way to think about its value.

Find out why Datadog's -6.3% return over the last year is lagging behind its peers.

Approach 1: Datadog Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow model estimates what a business is worth today by projecting its future cash flows and discounting them back to the present. For Datadog, this uses a 2 stage Free Cash Flow to Equity approach, based on its ability to generate and grow cash over time.

Datadog currently generates about $874.3 Million in free cash flow. Analyst estimates and extrapolations in the model suggest this could rise to roughly $3.0 Billion by 2029, with further growth taking projected free cash flows into the mid $5 Billion range by 2035. Simply Wall St uses analyst forecasts where available and then tapers growth assumptions over the longer term to avoid unrealistically steep curves.

Using these projected cash flows, the model arrives at an intrinsic value of about $209.60 per share. Compared with the current market price, this model outcome implies the stock is roughly 27.0% undervalued, which indicates that, within this framework, the market may be underestimating Datadog’s long term cash generation potential.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Datadog is undervalued by 27.0%. Track this in your watchlist or portfolio, or discover 908 more undervalued stocks based on cash flows.

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Datadog.

Approach 2: Datadog Price vs Sales

For high growth software companies that are still converting much of their potential into future profits, the Price to Sales (P/S) ratio is often the cleanest way to compare value, because revenue is less volatile and easier to forecast than earnings.

In general, the higher a company’s growth and the lower its perceived risk, the higher the “normal” or “fair” sales multiple investors are willing to pay. Slower growth or higher uncertainty typically pulls that fair multiple down.

Datadog currently trades on a P/S ratio of 16.71x, which is well above the broader Software industry average of 4.91x and also ahead of its closer peer group at about 7.32x. Simply Wall St’s proprietary Fair Ratio for Datadog is 13.42x, which estimates the P/S multiple the business should command after factoring in its growth outlook, margins, industry, market cap, and risk profile. This makes it more tailored than simple peer or industry comparisons, which can miss important differences in quality and prospects.

Comparing Datadog’s actual 16.71x P/S to the 13.42x Fair Ratio suggests the shares are trading at a premium to what its fundamentals justify.

Result: OVERVALUED

PS ratios tell one story, but what if the real opportunity lies elsewhere? Discover 1443 companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Datadog Narrative

Earlier we mentioned that there is an even better way to understand valuation, so let us introduce you to Narratives. These are simple, story driven forecasts where you connect your view of Datadog’s business to specific assumptions for future revenue, earnings, and margins. Those assumptions then flow through to a Fair Value that you can compare with today’s share price to decide whether to buy, hold, or sell.

On Simply Wall St’s Community page, Narratives are an easy, accessible tool used by millions of investors to translate a company’s story into numbers, and then into an actionable valuation that automatically updates as new information like earnings results or major news arrives.

This matters because Datadog can reasonably support very different stories. For example, one bullish Narrative might lean into accelerating AI demand, international expansion, and rising profitability to support a Fair Value closer to the upper analyst range around 200 dollars per share. A more cautious Narrative might emphasize competitive pricing pressure, customer optimization, and regulatory risk to justify something nearer the low end around 105 dollars. By choosing or customizing the Narrative that best reflects your expectations, you get a dynamic, transparent framework for making and revisiting your Datadog investment decisions.

Do you think there's more to the story for Datadog? Head over to our Community to see what others are saying!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.