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Artificial intelligence (AI) is still a nascent technology, but it will be integrated into more products and experiences in the coming years. In doing so, AI will undoubtedly become a multi-trillion market, reshaping businesses and even entire industries in the process.
Wedbush analyst Dan Ives recently wrote:[W]We believe the stage is set for a 1995 moment because AI is the most revolutionary technology we have seen since the beginning of the internet. ” This represents such tremendous value creation that investors should look at AI as something that once existed. A once in a generation opportunity.
The smartest way to take advantage of that opportunity is to build a basket of AI stocks. data dog (DDOG 1.75%) It is worth getting into such a basket. Here’s why:
Datadog is the leader in observability software
Datadog provides observability and cybersecurity software for development, operations, and security teams. Its platform includes a number of products that aggregate and analyze machine data from applications and infrastructure, helping businesses identify and resolve performance issues and security threats across their IT ecosystem. We will support you. The Datadog platform also leverages AI to automate incident investigation and remediation.
Datadog has received praise from multiple industry experts.consulting gartner The company considers itself a leader in application performance monitoring thanks to its extensive product portfolio. Similarly, forrester research considers the company a leader in AI for IT operations because its platform provides unparalleled data insights and visualization.
Datadog also has a strong presence in several other observability areas. This includes cloud infrastructure monitoring, log monitoring, network monitoring, server monitoring, and more.To quote morgan stanley“Datadog has established itself as the leading observability platform for modern cloud environments.”
This rich market presence is evidence of a winning strategy. Datadog offers a broad suite of integrated software so you can acquire customers in a variety of ways and grow those customer relationships over time. The ability to integrate observability and security workflows is especially attractive to organizations looking to reduce operational complexity and eliminate unnecessary vendors.
Ultimately, that value proposition led to consistently strong sales growth. As you can see in the chart below, quarterly earnings have experienced a compound annual growth rate of 52% over the past three years.
Graph by author.
To add some context, Datadog is unlikely to see its revenue grow 52% annually in the future. In fact, in the most recent quarter revenue growth slowed to 25%. However, if corporate spending improves under more favorable economic conditions, this number could certainly accelerate again, especially as Datadog stands to benefit from AI spending.
Datadog is positioned as a leading enabler of AI
As IT environments become more complex, observability software becomes increasingly important. That means trends like cloud migration and AI adoption are a tailwind for Datadog. Many companies are now using generative AI to build applications for data analysis, intelligent search, and media content creation.
Datadog provides integrations that help enterprises monitor each layer of their AI stack, including infrastructure such as: Nvidia Graphics processing unit. Data storage solutions such as vector databases.model deployment tools etc. Amazon Powered by SageMaker and Vertex AI alphabetGoogle. and large-scale language models (LLMs).
These integrations are useful when companies want the flexibility to build custom monitoring solutions, but some companies prefer pre-built products. For these customers, Datadog recently released LLM Observability, a software module that helps enterprises monitor the performance of their generative AI applications and the underlying LLM.
Finally, Datadog recently debuted Bits AI, a natural language interface that leverages generative AI to automate workflows related to incident investigation and remediation. In other words, Bits AI is the co-pilot that helps development and operations teams increase productivity.
Some Wall Street analysts see significant upside in these new integrations and products. For example, Morgan Stanley analyst Sanjit Singh recently named Datadog as one of the software companies best positioned to benefit from generative AI. Similarly, Wolfe Research analyst Alex Zukin believes Datadog has the potential to become the “fastest growing software company” as the generative AI movement continues to gain momentum.
Datadog stock is currently trading at a fair price
Datadog expects the observability software addressable market to grow at 11% annually to reach $62 billion by 2026. However, given its strong market presence and rapid development of generative AI tools, the company should significantly exceed that number. surely, Lucifer Analysts expect Datadog to grow its revenue by 31% per year over the next five years.
In that context, the current valuation of 20 times sales is acceptable, especially given the three-year average of 31 times sales. An investor should feel comfortable buying a small position in this growth stock today, provided he plans to hold it for at least five years. Additionally, investors should remember that building a basket of AI stocks is the smartest strategy.
John Mackey, former CEO of Amazon subsidiary Whole Foods Market, is a member of the Motley Fool’s board of directors. Alphabet executive Suzanne Frye is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions at his Amazon and his Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Datadog, and Nvidia. The Motley Fool recommends his Gartner. The Motley Fool has a disclosure policy.
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