Nasdaq Correction: 1 Artificial Intelligence (AI) Stock Down 45% You'll Wish You'd Bought on the Dip, According to Wall Street

The Nasdaq Composite index is made up of almost every stock listed on the Nasdaq exchange. It soared by 28% during 2024 thanks to massive gains in artificial intelligence (AI) stocks, but it's currently down 12% from its December record high, placing it in correction territory.

History suggests that corrections are an ideal time to buy stocks, because U.S. markets have always climbed to new highs over the long term. Datadog (NASDAQ: DDOG) developed a cloud platform that helps businesses monitor their digital infrastructure, and it recently pivoted into the AI space. Its stock has dipped from its recent peak amid the sell-off in the broader market, and it's down 45% from its all-time high, which was set during the tech frenzy in 2021.

Where to invest $1,000 right now? Our analyst team just revealed what they believe are the 10 best stocks to buy right now. Learn More »

But the weakness hasn't deterred Wall Street. The Wall Street Journal tracks 47 analysts who cover Datadog stock, and the overwhelming majority have assigned it the highest-possible buy rating. In fact, not one analyst recommends selling.Here's why investors might want to buy into the Datadog story during the Nasdaq correction.

Image source: Getty Images.

Expanding into AI

Datadog's cloud observability platform is used by businesses in a variety of industries, from gaming to financial services to retail. Sony uses it to connect the three global offices that manage its Playstation Network, allowing engineers to view all the data from its 94 million monthly active users in one place. This means they can instantly spot technical glitches and fix them before millions of users are affected, saving the company time and money.

Similarly, a retailer might be unaware that its e-commerce website is down for users in one country until it discovers a sharp decline in sales. But if it's using Datadog, it will send an alert about the issue the moment it arises, so the retailer can rectify it before it affects the customer experience.

Datadog is now rapidly expanding into AI. It launched an observability tool for large language models (LLMs) last year, which helps developers rapidly troubleshoot technical issues, evaluate the quality of their outputs, and track costs. This tool will become increasingly important over time as LLMs become bigger and more complex to pave the way for better AI software, making manual troubleshooting processes far too erroneous.

Datadog also created another monitoring tool for businesses that use OpenAI's popular LLMs, which enables them to track their consumption so they can allocate their usage budgets more effectively. The use of third-party LLMs is increasing because it can help developers bring AI software to market much faster -- and at a reduced cost -- compared to creating their own models from scratch.

Datadog had 30,000 total customers at the end of 2024, and it said 3,500 of them were using at least one of its AI products. That represented a 75% increase from the start of the year, when 2,000 customers had adopted an AI product.

Datadog's AI revenue is soaring

Datadog generated a record $2.68 billion in total revenue during 2024, which was a 26% increase compared to the prior year. It was above the company's most recent forecast of $2.66 billion, which management had raised three times throughout the year.

However, there is an even better growth story brewing beneath the surface of Datadog's headline number. During the fourth quarter of 2024, the company said revenue attributable to AI customers represented 6% of its total revenue for the period. Although that sounds like a relatively small portion, it doubled from 3% in the final quarter of 2023.

Datadog's strong 2024 results were even more impressive when you consider that it carefully managed its costs to improve its bottom line. The company grew its total operating expenses by 20%, which was much slower than the pace at which its revenue increased. As a result, its GAAP (generally accepted accounting principles) net income soared by 278% to $183.7 million for the year.

Datadog was even more profitable on a non-GAAP basis, which excludes one-off costs related to acquisitions, and non-cash expenses like stock-based compensation. It generated $653.8 million in net income by that measure, representing growth of 41% compared to 2023.

Datadog stock looks attractive relative to its historical valuation

Based on Datadog's 2024 revenue, its stock trades at a price-to-sales (P/S) ratio of 13.9, which is a 51% discount to its long-term average of 28.7 dating back to when it went public in 2019.

DDOG PS Ratio data by YCharts.

That average is somewhat skewed by the 2021 period, when Datadog stock traded at an eyewatering P/S ratio of above 60 (which was an unsustainable valuation), so I'm not suggesting it will climb to 28.7. However, its current P/S ratio of 13.9 is clearly at the lower end of the stock's historical range, so there might be room for some upside.

Wall Street certainly thinks so. Of the 47 analysts tracked by The Wall Street Journal, 30 have assigned it the highest possible buy rating. Seven others are in the overweight (bullish) camp, and the remaining 10 recommend holding. No analysts recommend selling.

They have an average price target of $161.74, which implies a potential upside of 54% from where the stock trades as of this writing. The Street-high target of $230 suggests that it could even soar by 120%.

If Datadog's AI business continues to grow at the current pace, it won't be long before it accounts for a meaningful portion of the company's total revenue. According to a study by McKinsey & Company last year, 78% of organizations are already using AI in at least one business function. If this technology becomes as widely deployed as cloud computing, there is going to be insatiable demand for Datadog's observability tools to ensure it's performing as expected.

As a result, investors might want to use the Nasdaq correction to add Datadog stock to their portfolios, and hold on to it for the long term.

Should you invest $1,000 in Datadog right now?

Before you buy stock in Datadog, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Datadog wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Consider when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you’d have $721,394!*

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than quadrupled the return of S&P 500 since 2002*. Don’t miss out on the latest top 10 list, available when you join Stock Advisor.

See the 10 stocks »

*Stock Advisor returns as of March 18, 2025

Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Datadog. The Motley Fool recommends Nasdaq. The Motley Fool has a disclosure policy.