Datadog (DDOG) is likely to post a Q2 beat with a slight increase on H2 estimates on signs of market share gains and rapid product innovation as it gains traction with the artificial intelligence ecosystem, Morgan Stanley said in a Thursday research report.

Innovation within the application infrastructure reveals early signs of a transition to a "build" cycle as the company's new frameworks and protocols enable more developer clients to build custom AI applications, according to the note.

Growing traction with AI-native customers, including Microsoft (MSFT)-backed OpenAI, indicates a positive signal for Datadog's platform and product strategy, analysts wrote.

The company's inclusion in the S&P 500 index serves as an important event and could drive demand for shares and support valuation in the near term, Morgan Stanley said.

Morgan Stanley boosted its revenue forecast for fiscal years 2025, 2026, and 2027 to 23%, 18%, and 20%, respectively.

The brokerage said it reiterated its equalweight rating on the stock and raised its price target to $165 per share from $115.

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