Datadog DDOG, the leading AI-powered observability and security platform, delivered strong second-quarter 2026 results, with both the top and bottom lines exceeding expectations. Total revenues rose 36% to $1.12 billion, while non-GAAP EPS of 65 cents rose 41.3% year over year.
Building on this momentum, Datadog raised its full-year 2026 revenue guidance to $4.45-$4.47 billion, implying approximately 30% year-over-year growth. The company also increased its non-GAAP EPS outlook to $2.50-$2.54, underscoring management’s confidence in its growth line.
Analyst sentiment remains positive, with the Zacks Consensus Estimate projecting 2026 revenues of $4.41 billion, up 28.82% year over year. The earnings estimate of $2.43 per share has also been revised upward over the past 60 days, implying 18.54% year-over-year growth and indicating expectations for continued strong financial performance, which supports the stock’s investment outlook.
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The bullish sentiment is also reflected in DDOG's stock performance. The company’s shares closed at $233.93 on Friday, gaining 4.64% for the session, and have surged 72% year to date. This significantly outpaces the Zacks Internet - Software industry, which has declined 3.2%, and the broader Zacks Computer and Technology sector, which has gained 18.3%.
Datadog has also outperformed its peers, including Arista Networks ANET, Paycom Software PAYC and Unity Software U, over the same time frame. While Arista Networks and Paycom Software shares have appreciated 44% and 34.9%, respectively, Unity Software shares have fallen 2.6%, highlighting Datadog’s stronger stock market performance.
YTD Price Performance Comparison
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Now, the question arises: is this the right time to add this stock to your portfolio? Let us examine the key factors driving the rise in the share price, the emerging AI opportunity and valuation to assess the stock’s investment prospects.
Key Q2 Tailwinds Supporting DDOG Stock
Datadog’s latest results highlight sustained business momentum, driven by growing customer adoption and the expanding role of its platform in managing increasingly complex cloud and AI workloads. Strong cash generation was another key positive, with the company delivering $316 million in operating cash flow and $279 million in free cash flow during the second quarter, translating into a 25% free cash flow margin. Datadog ended the quarter with approximately $5 billion in cash, cash equivalents and marketable securities, providing a strong financial cushion to support continued investments in product innovation, strategic initiatives and potential acquisitions.
Customer growth and expansion trends also remain encouraging. Datadog ended the second quarter with roughly 33,400 customers, while the number of customers generating at least $100,000 in ARR increased 23% year over year to approximately 4,720, accounting for about 91% of total ARR. Importantly, customers are increasingly adopting multiple Datadog products: 58% now use at least four products, compared with 52% a year ago, while 13% use 10 or more products, versus 7% a year ago. RUM has also surpassed $200 million in ARR and is growing more than 50% year over year. This increasing platform adoption could support higher customer spending and strengthen retention over the long term.
Another significant area of long-term growth is platform consolidation and enterprise-level expansion. In the second quarter, Datadog’s RPO reached $3.47 billion — a 43% increase year over year — while current RPO grew by approximately 40% during the same period. The company also won several large enterprise deals, including a multiyear deal worth more than $30 million in total contract value in which a major online media company standardized on Datadog and replaced four commercial and internal tools.
Datadog is also expanding into security, data observability, cloud cost management, digital experience and Bring Your Own Cloud. These opportunities could allow the company to capture a larger share of enterprise technology spending while increasing the value of its platform beyond traditional observability.
AI Adds a New Secular Growth Driver for DDOG
AI is emerging as a powerful new growth catalyst for Datadog, complementing its established secular tailwinds from cloud migration and digital transformation. As AI workloads expand cloud consumption, they are driving greater demand for Datadog’s observability platform. The company now serves more than 750 AI customers, including all 10 of the top AI leaders, while AI monitoring volumes have accelerated sharply.
The opportunity could broaden further as AI moves from model training toward inference and agentic applications. Datadog sees observability opportunities across the entire AI stack — from GPUs and infrastructure to LLMs, tool calls, applications and agent outcomes. Its expanding Datadog for AI portfolio, including Agent Observability, GPU Monitoring, Data Observability and AI Guard, positions DDOG to capture this emerging demand.
DDOG Stock Trades at a Premium
Datadog shares are trading at a premium, as suggested by a Value Score of F.
In terms of the forward 12-month price-to-sales (P/S), Datadog is trading at 16.81X, higher than the industry’s 4.05X. DDOG also trades at a higher multiple than Arista Networks (16.64X), Paycom Software (4.22X) and Unity Software (7.77X).
DDOG Forward 12-Month P/S Ratio
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Conclusion
Datadog enters the second half of 2026 with compelling fundamental momentum. Accelerating customer adoption, expanding enterprise penetration, strong cash generation and AI-driven demand provide multiple avenues for long-term growth. The company’s ability to expand from observability into security and AI management could further increase its addressable market. These factors are expected to push the stock upward and justify a premium valuation.
Datadog currently carries a Zacks Rank #2 (Buy) and a Growth Score of A, a favorable combination that offers a strong investment opportunity per the Zacks Proprietary methodology. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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This article originally published on Zacks Investment Research (zacks.com).