Key Points
Nvidia still plays a central role in the accelerating adoption of AI, but investors are looking for other opportunities.
Datadog stock languished last year over fears the company’s tools would be displaced by AI.
Turns out that Datadog will play a critical role in monitoring AI systems, making its services indispensable.
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When it comes to the artificial intelligence (AI) boom, Nvidia (NASDAQ: NVDA) is the stock by which all others are measured. The company supplies the semiconductors that enabled the recent advances in AI, and it has been one of the undeniable beneficiaries of the AI revolution. Despite concerns about growing competition, uncertainty about future AI adoption, and economic and geopolitical uncertainty, Nvidia stock has gained 21% thus far in 2026 (as of market close on Wednesday), outpacing both the S&P 500 and the Nasdaq Composite, which have risen by 9% and 14%, respectively.
However, one AI stock is running circles around Nvidia. AI-powered observability and security platform Datadog (NASDAQ: DDOG) has risen like a phoenix from the ashes, soaring 51% in 2026, delivering more than double Nvidia’s gains.
Will AI create the world’s first trillionaire? Our team just released a report on the one little-known company, called an “Indispensable Monopoly” providing the critical technology Nvidia and Intel both need. Continue »
Let’s take a look to see what’s driving the recent surge and why there might be more to come.
Image source: Getty Images.
The tide has turned
Last year was a challenging one for Datadog investors. One of the biggest issues weighing on the stock was the fear that advances in AI would render traditional software-as-a-service (SaaS) companies obsolete. This was accompanied by decelerating growth for much of the past couple of years, which seemed to confirm investors’ worst fears. That all seemed to change at the dawn of 2026.
In the first quarter, Datadog generated revenue that climbed 32% year over year to $1 billion. This marked the company’s first $1 billion quarter and its fastest pace of growth in three years. Adjusted earnings per share (EPS) rose 30% to $0.60.
For context, analysts’ consensus estimate called for revenue of $932 million and adjusted EPS of $0.51, so Datadog cleared both hurdles with plenty of room to spare.
Fueling the results was robust growth among Datadog’s most lucrative customers, as those providing annual recurring revenue (ARR) of $100,000 or more rose to 4,550, up 21%.
The company’s cash generation was also robust, with operating cash flow of $335 million and free cash flow of $289 million, which rose 23% and 18%, respectively.
One of the biggest developments of the quarter was the launch of GPU monitoring. Businesses are adopting AI at a rapid pace, but concerns about return on investment (ROI) remain. Datadog helps businesses optimize spending and performance as they scale their AI projects by monitoring the health, cost, and performance of their GPUs. Customers also benefit from faster troubleshooting and greater cost savings from their AI investment, which, in many cases, is substantial.
It isn’t surprising, then, that Datadog landed several large AI-centric deals during the quarter, including numerous six-, seven-, and eight-figure annualized deals. A couple were notable, with “two of the world’s largest technology companies … building and training the most advanced AI models in the world.” By using Datadog’s tools, they were able to “accelerate the pace of innovation on their hyperscale AI training workloads,” according to management.
After its blockbuster financial report, Datadog raised its full-year forecast. The company is now guiding for revenue of $4.32 billion and adjusted EPS of $2.40 at the midpoint of its guidance. This is a substantial increase from its previous guidance, which called for revenue of $4.08 billion and adjusted EPS of $2.12.
Not apples-to-apples
To be fair, this clearly isn’t an apples-to-apples comparison. Datadog generated $1 billion in quarterly revenue for the first time, while Nvidia makes that much in a couple of days. Furthermore, Nvidia outlook calls for 77% revenue growth, which dwarfs Datadog’s forecast for 30% growth. It does, however, illustrate an important point. As AI adoption moves further downstream, investors are following suit, looking for the next generation of AI winners. Those with good prospects are being amply rewarded.
Datadog appears to have cracked the code for helping customers join the AI revolution and get a greater ROI. In doing so, the company has dispelled the notion that its services will be disrupted by AI.
Wall Street is squarely on board. In May, 92% of analysts who issued an opinion on Datadog rate the stock a buy or strong buy, and none recommend selling. Furthermore, in the wake of the company’s blockbuster quarter, analysts scrambled to update the price targets as the stock continues to gain ground. Datadog is already closing in on the average price target of $220, which represents potential upside of about 7% (as of this writing).
Is the stock a buy?
That leads us to the quintessential investing question: Is Datadog stock a buy? On the heels of its eye-catching quarter, investors have flocked back to Datadog stock, which soared 95% over the past month (as of this writing). That price spike has brought a commensurate increase in the stock’s valuation. At 72 times next year’s expected earnings, Datadog is “fetching” a premium.
Value investors will no doubt balk at the company’s pricey multiple, while growth investors may be game. For those still interested, buying a small position as part of a balanced portfolio is likely the right approach, while looking for opportunities to add at better value points over time.
As a longtime Datadog shareholder, I’ll be watching to see if the company’s accelerating growth continues.
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Danny Vena, CPA has positions in Datadog and Nvidia. The Motley Fool has positions in and recommends Datadog and Nvidia. The Motley Fool has a disclosure policy.