One Magnificent Artificial Intelligence (AI) Stock Buy Following the Latest DIP

Key Points

• Datadog produced strong results for the last quarter, bringing up guidance for the full year.

• With the adoption of AI-focused tools, its revenues are growing with impressive clips.

• Cloud surveillance platforms have a larger customer base, which opens up more opportunities.

• 10 stocks I like more than DataDog›

Stocks datadog (NASDAQ: DDOG) It fell 4% after the company announced its second quarter results on August 7th, which is surprising. Datadog's revenue and revenues are far ahead of expectations, and the company increased its revenue guidance for the year.

DataDog provides a cloud-based platform that allows customers to monitor and analyze cloud infrastructure and applications. They also sell cloud security services to help customers scan their cloud infrastructure for vulnerabilities. The latest results reveal that demand for cloud-based solutions is rising thanks to the surge in artificial intelligence (AI).

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Let's take a look at how AI is driving Datadog's growth and why it's best to buy stocks after the latest decline.

AI tools are driving the growth of the company

Datadog reported a 28% year-on-year revenue increase to $827 million in the second quarter, easily crushing the $791 million consensus Wall Street estimate. Earnings of $0.46 per share exceeded the consensus estimate of $0.41.

CEO Olivier Pomel said in his latest revenue conference call that “the number of AI-Native customers is growing meaningfully together with us as they are rapidly using it in our products.”

The company is actively launching new AI-powered observability and security tools, and customers are adopting them. Management announced more than 125 new products and features a few months ago. This includes a fully autonomous AI agent for monitoring and responding to alerts, a security assistant with AI and an AI-enabled coding assistant fixed issues with customers' cloud applications.

This provides the observability of end-to-end AI-enabled data that can be deployed to popular cloud AI infrastructure providers coreweave. This should be a tailwind for DataDog, given the rapidly growing demand for AI applications in the cloud. The company has already witnessed meaningful benefits in adopting services for AI.

Of the roughly 31,400 customers, more than 4,500 are using AI tools and spending more money, Pommel said in a revenue conference call.

The CEO added that the company currently has 11% of its top line from AI-Native customers, up from just 4% in the same period last year. Specifically, these customers accounted for a 10% point increase in second quarter revenue, up five times from the same period last year. The company's customer base grew 9% year-on-year, with existing customers spending more money on services.

Datadog's dollar-based net retention rate rose to 120% from the mid-term range last year. This metric compares annual recurring revenue (ARR) from customers for the year, from the same customer cohort from the same year ago. The majority of DataDog's customer base is not yet using AI tools, opening up more cross-selling and more powerful growth possibilities.

Overall, the combination of increased customer numbers and improved spending by existing customers is why the remaining performance obligations (RPOs) rose 35% in the last quarter to $2.4 billion. This was faster than the quarterly revenue growth. This is a positive as this indicator refers to the total value of a contract for a company that is not yet satisfied.

Inventory is expensive, but it can help to justify it if growth is strengthened

DataDog trades with expensive 76x advance revenue. One reason is aggressive R&D spending along with sales and marketing. The company's total operating expenses increased approximately 37% year-on-year in the last quarter. This spike appears to be justified considering the pace at which new AI tools are being launched.

However, higher spending will affect the company's ultimate growth in 2025. Datadog expects revenues to be flat this year compared to last year's $1.82 per share. However, these investments will help you build a stronger revenue pipeline by attracting more businesses from existing customers.

This should ultimately strengthen the revenue growth. This is exactly what analysts expect.

DDOGEPS estimates of current fiscal year data by YCHARTS. EPS = Earnings per share.

The company has the ability to surpass consensus estimates in the future as adoption of AI tools improves. So investors looking for growth stocks can consider DataDog following the latest DIP as it helps AI get back into Mojo.

Should I invest $1,000 in DataDog now?

Consider this before purchasing stock on DataDog.

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The harsh Chauhan has no position in any of the stock mentioned. Motley Fool has a position in Datadog and is recommended. Motley Fools have a disclosure policy.