The Newest Stock in the S&P 500 Has Soared 315% Since Its 2019 IPO, and It's a Buy Right Now, According to Wall Street

Datadog (DDOG) is set to join the S&P 500 on July 9th, reflecting its robust performance since its late 2019 IPO, with its stock surging 315% against the S&P 500's 109%. The cloud monitoring and analytics platform reported strong Q1 results, including a 25% year-over-year revenue increase to $762 million and a 30% rise in free cash flow to $244 million, driven by expanding customer adoption and product usage. Despite a premium valuation, Wall Street maintains a largely bullish outlook, citing Datadog's critical role in digital transformation and AI, its expanding total addressable market, and strong long-term free cash flow projections, with a forward PEG ratio of 0.4 suggesting potential undervaluation for a high-growth company.

Analysis

Datadog's (DDOG) upcoming inclusion in the S&P 500 on July 9 serves as a significant validation of its sustained profitability and market leadership in the cloud observability space. The inclusion follows a period of substantial outperformance since its 2019 IPO, with the stock gaining 315% versus the S&P 500's 109%, underpinned by a 694% rise in revenue. The company's strategic position benefits from secular tailwinds in cloud adoption and AI, as evidenced by its recognition as a leader by both Gartner and Forrester. Q1 financial results reaffirm this strong momentum, with revenue growing 25% year-over-year to $762 million and free cash flow increasing 30% to $244 million. Critically, customer metrics demonstrate successful execution of a 'land-and-expand' strategy; customers with over $100,000 in annual recurring revenue grew 13%, and the percentage of customers using six or more products increased from 23% to 28%. While the stock trades at premium forward multiples of 76x earnings and 14x sales, its forward price/earnings-to-growth (PEG) ratio of 0.4 suggests it may be undervalued relative to its growth prospects. This view is supported by a strong bullish consensus from Wall Street, with 38 of 46 analysts recommending a buy, citing a long-term growth runway and a total addressable market projected to hit $175 billion by 2034.

Key Decisions for Investors

• Investors should note the July 9th S&P 500 inclusion date, as the associated mandatory buying from index funds could provide a short-term catalyst and increased liquidity for the stock.
• For growth-oriented portfolios, the combination of 25% revenue growth, a 30% increase in free cash flow, and a low PEG ratio of 0.4 may justify the premium valuation, presenting a compelling long-term opportunity in the cloud and AI infrastructure sectors.
• Despite the bullish consensus, investors must monitor Datadog's ability to maintain its high-growth trajectory and FCF generation, as any deceleration could challenge the current valuation, especially given the company previously lowered guidance in response to macroeconomic factors.