For Datadog (DDOG -1.22%) shareholders, the past few years must have felt like treading water. The volatile stock shed approximately 38% from its 52-week high at the time of writing and is nowat levels first reached back in 2020.

This frustrating performance stands in contrast to the impressive growth momentum from the cloud-computing leader in observability and monitoring. The company is capitalizing on strong demand for solutions that address the increasingly complex data demands generated by artificial intelligence (AI) applications. Several trends support a positive long-term outlook.

Here are three reasons Datadog stock is still a top AI stock to buy right now.

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1. AI-powered growth opportunity

The Datadog platform acts as a central data hub for organizations, providing real-time visibility across their entire technology stack, including key cloud performance metrics, analytics, security, and system bottlenecks. Its unified approach uses integrates data from more than 900 software applications to identify problems and increase efficiency.

New data-intensive AI workflows add to the need for comprehensive observability, representing a major growth driver. Datadog isn't just benefiting from the rise of AI -- it actively integrates AI tools into its platform, including through its Bits AI generative AI assistant. Solutions enhancing automation and intelligent analysis further bolster the company's value proposition for its customers.

According to estimates from the industry research group Gartner, the public cloud services market is currently valued at $600 billion and is projected to nearly double in the coming years, with a 20% compound annual growth rate (CAGR) through 2028. Moreover, companies are allocating an increasing percentage of their total IT spending to the cloud.

This significant tailwind underscores the substantial opportunity for Datadog and its attractiveness as an investment.

2. Robust operating tailwinds

In the recently reported first quarter, revenue grew by 25% year over year to $762 million, surpassing Wall Street's expectation of $741.5 million. Similarly, adjusted earnings per share (EPS) of $0.46 came in above the $0.43 market estimate.

Datadog has approximately 30,500 customers, including 3,770 that each generate more than $100,000 in annual recurring revenue (ARR) in software-as-a-service subscriptions. Perhaps the most encouraging metric is the 110% dollar-based net retention rate over the past year, as the company's customer base increases spending on the platform by adopting additional products.

Strong demand for AI solutions is a key part of the growth story. The number of customers using its large language model (LLM) Observability product more than doubled in just the past six months. Datadog continues to strengthen its platform through strategic bolt-on acquisitions, including Metaplane, an AI-powered data observability specialist acquired in April, and Eppo, an AI experimentation platform purchased just this month. These deals enhance Datadog's reach in data monitoring and real-time AI analytics, boosting its competitive edge.

3. Free-cash-flow momentum

For the full year 2025, Datadog targets revenue between $3.215 billion and $3.235 billion, reflecting a robust 20% to 21% growth rate from the prior year. While ongoing investments in research and development, particularly in AI capabilities, create some operating margin pressure, EPS estimates of $1.67 to $1.71 for the year demonstrate strong underlying profitability. Even more encouraging is the free-cash-flow trend, which reached $833 million over the past year, surging 39% from year-end 2023.

This dynamic supports the stock's premium valuation. Datadog shares trade at a forward price-to-earnings (P/E) ratio of 64 -- high compared to the broader stock market, but still attractive relative to other high-growth software infrastructure peers.

Compared to stocks like CrowdStrike, Cloudflare, Zscaler, CyberArk Software, and SentinelOne, which collectively average a forward P/E above 100, Datadog stands out with its unique blend of observability and cybersecurity capabilities, offering broader organizational use cases than pure-play cybersecurity companies. Investors who believe Datadog is just beginning to realize its potential have compelling reasons to buy and hold the stock for the long run.

DDOG PE Ratio (Forward) data by YCharts

Final thoughts

Datadog's AI-fueled growth captures high-level themes, technology, and cloud computing to complement diversified portfolios. I'm bullish and expect shares to be trading at a higher price by this time next year.