2 Reasons to Watch DDOG and 1 to Stay Cautious

September 16, 2025 at 00:03 AM EDT

DDOG Cover Image

Datadog’s 33.3% return over the past six months has outpaced the S&P 500 by 16.8%, and its stock price has climbed to $138.60 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now still a good time to buy DDOG? Or are investors being too optimistic? Find out in our full research report, it’s free.

Why Does Datadog Spark Debate?

Named after a database the founders had to painstakingly look after at their previous company, Datadog (NASDAQ: DDOG) provides a software platform that helps organizations monitor and secure their cloud applications, infrastructure, and services.

Two Positive Attributes:

1. ARR Surges as Recurring Revenue Flows In

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Datadog’s ARR punched in at $3.47 billion in Q2, and over the last four quarters, its year-on-year growth averaged 26%. This performance was impressive and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes Datadog a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue. Datadog Annual Recurring Revenue

2. Excellent Free Cash Flow Margin Boosts Reinvestment Potential

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Datadog has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging 28.3% over the last year. The divergence from its underwhelming operating margin stems from the add-back of non-cash charges like depreciation and stock-based compensation. GAAP operating profit expenses these line items, but free cash flow does not.

Datadog Trailing 12-Month Free Cash Flow Margin

One Reason to be Careful:

Shrinking Operating Margin

While many software businesses point investors to their adjusted profits, which exclude stock-based compensation (SBC), we prefer GAAP operating margin because SBC is a legitimate expense used to attract and retain talent. This is one of the best measures of profitability because it shows how much money a company takes home after developing, marketing, and selling its products.

Analyzing the trend in its profitability, Datadog’s operating margin decreased by 2.6 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Datadog’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers. Its operating margin for the trailing 12 months was breakeven.

Datadog Trailing 12-Month Operating Margin (GAAP)

Final Judgment

Datadog has huge potential even though it has some open questions, and with its shares topping the market in recent months, the stock trades at 13.7× forward price-to-sales (or $138.60 per share). Is now the time to initiate a position? See for yourself in our comprehensive research report, it’s free.

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