1 Unstoppable Stock Down 37% to Buy Hand Over Fist, According to Wall Street

The technology sector is on a tear in 2024, led by some of the largest companies in the world. As of this writing, the Nasdaq-100 index is up 22% year to date, with Nvidia stock soaring 182% and Meta Platforms stock up 57%.

The smaller end of the tech sector isn't performing quite as well, however, and many stocks are still trading below their record levels from 2021. Datadog (NASDAQ: DDOG) stock, for example, is up just 4%, and it's still sitting about 37% below its all-time high.

The company is a leading provider of critical cloud monitoring software, and it has an expanding portfolio of artificial intelligence (AI) products which are delivering rapid growth. The Wall Street Journal tracks 44 analysts who cover Datadog stock, the overwhelming majority of whom have assigned it the highest-possible buy rating.

Here's why investors might want to buy the stock while it's still on the upswing.

Image source: Getty Images.

Datadog's software is very important for modern organizations

Datadog developed a cloud observability platform to help businesses transition into the digital age. It monitors their infrastructure around the clock to identify technical glitches so they can be rectified before they impact the customer experience.

For example, a retailer might be unaware its website is down for a specific subset of users in one country until it notices a drop in sales, but if it uses Datadog, that issue could be flagged immediately. The same goes for each of the 29,200 businesses which rely on Datadog, whether they are in financial services, entertainment, media, or a host of other industries.

Datadog is now moving into the AI space. It launched Bits AI last year, which is a virtual assistant designed to accelerate workflows on its observability platform. It can instantly create incident summaries, and it can be prompted to provide deeper explanations to save managers countless hours of manual investigative work. Bits AI can even offer technical suggestions to prevent an issue from recurring.

The company also created a brand new observability platform for large language models (LLMs), which sit at the foundation of every AI chatbot or virtual assistant. With Datadog's tool, developers can rapidly troubleshoot technical issues, monitor costs, and even track response quality to ensure the model is delivering appropriate outputs for the end user.

The LLM observability platform seamlessly integrates with OpenAI, Anthropic, Microsoft Azure, and Amazon Bedrock, so it can be set up in a matter of seconds. As more companies integrate AI into their day-to-day operations, observability tools will become increasingly important to ensure customers and employees are receiving satisfactory information.

Rapid growth in AI revenue

Datadog generated a record $690 million in revenue during the third quarter. That was a 26% increase from the year-ago period, and it was also way above the high end of management's guidance, which was $664 million. That prompted management to increase its full-year 2024 forecast for the third consecutive time, as management now expects $2.66 billion of revenue at the high end of its range.

AI played a role in the strong Q3 result. Datadog said AI-native customers accounted for over 6% of the company's total revenue during the quarter, which more than doubled from 2.5% in the year-ago period. Plus, around 3,000 of Datadog's 29,200 customers were using one or more AI integrations, which grew from 2,500 just three months earlier, so uptake is happening at a rapid pace.

Datadog is also making substantial progress on the bottom line. Over the last couple of years, it has transitioned from a growth-at-all-costs strategy (which often led to blowout losses) to a more sustainable posture, which involves carefully managing expenses to generate profits. During Q3, the company's net income came in at $51.7 million, up 128% year over year.

The business has now generated $138.1 million in net income through the first three quarters of 2024, a huge swing from the $5.4 million net loss it delivered in the same period last year.

Wall Street is very bullish on Datadog stock

Of the 44 analysts tracked by The Wall Street Journal, 32 have given Datadog stock the highest possible buy rating. Eight others are in the overweight (bullish) camp, and the remaining four recommend holding. Not one analyst recommends selling.

The analysts have an average price target of $153.79, which implies upside of 22% over the next 12 months from where Datadog stock trades as of this writing. However, the Street-high price target of $230 suggests the stock could soar by 83%.

But there is one caveat: Datadog isn't exactly cheap. Its stock trades at a price-to-sales (P/S) ratio of 19.1 right now, which is notably more expensive than a basket of other enterprise software and cloud stocks:

Data by YCharts.

That said, Datadog has always traded at an elevated valuation. Its P/S ratio of 19.1 is actually a 35% discount to its average P/S ratio of 29.4 since going public in 2019.

Observability tools are likely to become a necessity for every company developing AI, in the same way observability tools are widely deployed by almost every company with complex cloud networks. According to a September survey by McKinsey and Company, 72% of organizations have adopted AI in at least one business function, and that number will only grow in the future.

That gives Datadog an enormous addressable market, which could expand for years, making the stock a great addition to any portfolio for the long term.

Don’t miss this second chance at a potentially lucrative opportunity

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• Nvidia: if you invested $1,000 when we doubled down in 2009, you’d have $368,131!*
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Right now, we’re issuing “Double Down” alerts for three incredible companies, and there may not be another chance like this anytime soon.

See 3 “Double Down” stocks »

*Stock Advisor returns as of November 18, 2024

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to Meta Platforms CEO Mark Zuckerberg, is a member of The Motley Fool's board of directors. Anthony Di Pizio has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Bill Holdings, Datadog, DigitalOcean, Meta Platforms, Microsoft, Nvidia, Snowflake, and Workiva. The Motley Fool recommends Confluent and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.