Is It Time To Reconsider Datadog (DDOG) After Mixed Returns And Conflicting Valuation Signals

• If you are wondering whether Datadog shares around US$124.52 still make sense for your portfolio, the key question is how that price lines up with the company’s underlying value.
• The stock has seen mixed returns recently, with a 1% decline over the last 7 days and a 2.2% decline over the past month, while still showing a 22.3% return over 1 year, 81.5% over 3 years, and 48.2% over 5 years.
• Recent headlines around Datadog have kept investor attention on how its products are being adopted and how the business is executing on its growth plans. This helps frame the share price moves you are seeing today. This context is important because sentiment often swings more sharply than the slow and steady changes in the underlying business.
• On our checks, Datadog scores a 2 out of 6 valuation score. This suggests there is more to unpack around how the market is pricing the stock, how different valuation methods compare, and whether a broader framework at the end of this article can give you an even clearer read on value.

Datadog scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Datadog Discounted Cash Flow (DCF) Analysis

A Discounted Cash Flow, or DCF, model takes Datadog’s expected future cash flows and discounts them back to today using a required rate of return. This gives an estimate of what the business could be worth per share in today’s dollars.

For Datadog, the model starts with last twelve months Free Cash Flow of about $928.1 million and uses analyst estimates for the next few years. It then extends those cash flows further out using Simply Wall St’s own projections. For example, projected Free Cash Flow in 2030 is $2,943.1 million, with a 2 Stage Free Cash Flow to Equity framework used to capture an earlier high growth phase followed by a later, more mature phase.

Bringing all those projected cash flows back to today results in an estimated intrinsic value of about $176.67 per share, compared with the current price of roughly $124.52. On this model, that gap implies the shares trade at about a 29.5% discount to the DCF estimate, which indicates the stock appears undervalued on this specific cash flow based view.

Result: UNDERVALUED

Our Discounted Cash Flow (DCF) analysis suggests Datadog is undervalued by 29.5%. Track this in your watchlist or portfolio, or discover 48 more high quality undervalued stocks.

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 profitable software companies, the P/S ratio is often a useful gauge because it ties the share price directly to the revenue the business is generating. This can be easier to compare across peers than earnings, which may be affected by accounting choices.

Expectations for growth and the level of business risk usually influence what investors see as a normal or fair P/S multiple. Higher expected growth or lower perceived risk can support a higher multiple, while slower growth or higher uncertainty often points to a lower one.

Datadog currently trades on a P/S of 12.86x, compared with the broader Software industry average of 3.39x and a peer average of 7.13x. Simply Wall St’s Fair Ratio for Datadog is 10.59x, which is a proprietary estimate of the P/S multiple that might be expected given factors such as the company’s growth profile, profit margins, industry, market cap and specific risks.

This Fair Ratio can be more informative than a simple peer or industry comparison because it adjusts for Datadog’s own characteristics rather than assuming all software companies deserve similar pricing. With the current 12.86x P/S sitting above the 10.59x Fair Ratio, this framework suggests the shares screen as overvalued on a sales-based view.

Result: OVERVALUED

P/S ratios tell one story, but what if the real opportunity lies elsewhere? Start investing in legacies, not executives. Discover our 18 top founder-led companies.

Upgrade Your Decision Making: Choose your Datadog Narrative

Earlier we mentioned that there is an even better way to understand valuation. Narratives let you attach your own story about Datadog to the numbers by linking how you see its products, competition and AI opportunity to a concrete forecast for revenue, earnings and margins, then to a Fair Value that you can compare with the current price on Simply Wall St’s Community page. Narratives are updated automatically when new news or earnings arrive and can differ widely. For example, one Datadog Narrative anchors to a more cautious Fair Value of about US$123.50 and US$4.3b of 2028 revenue, while another leans into a higher Fair Value of about US$241.36 and US$5.6b of 2028 revenue. This gives you a clear, easy to use way to decide whether today’s share price fits your own view of the story.

For Datadog however we will make it really easy for you with previews of two leading Datadog Narratives:

🐂 Datadog Bull Case

Fair value in this bull case: about US$208.49 per share.

Gap to this fair value: the current US$124.52 price sits around 40% below this estimate, using ((208.49 minus 124.52) divided by 208.49).

Revenue growth assumption used in this narrative: 21.46% a year.

• Focuses on strong demand for unified observability and security as cloud and AI workloads grow, with Datadog positioned as a key vendor for those trends.
• Assumes international expansion, product breadth and cost discipline help support higher margins and a premium P/E multiple over time.
• Flags risks around large AI customers, pricing pressure, competition and data privacy rules, but concludes that analyst estimates still support a higher fair value than today.

🐻 Datadog Bear Case

Fair value in this bear case: about US$123.50 per share.

Gap to this fair value: the current US$124.52 price sits around 1% above this estimate, using ((124.52 minus 123.50) divided by 123.50).

Revenue growth assumption used in this narrative: 18.45% a year.

• Highlights rising compliance costs, stricter data rules and demand for flexible or self hosted tools as potential headwinds for Datadog's cloud centric model.
• Assumes slower revenue growth, thinner margins and a very high P/E multiple are required to justify the bearish fair value, which leaves less room for error.
• Emphasizes competition from open source tools and hyperscaler offerings, along with customer cost cutting on observability, as key risks to both growth and pricing power.

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.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com