We came across a bearish thesis on Datadog, Inc. (DDOG) on Substack by Elliot. In this article, we will summarize the bears’ thesis on DDOG. Datadog, Inc. (DDOG)'s share was trading at $151.96 as of Nov 27^th. DDOG’s trailing and forward P/E were 276.29 and 73.53 respectively according to Yahoo Finance.

A close-up view of programmer hands typing on a keyboard for a 3D security platform.

Datadog has emerged as a key SaaS player, gaining significant attention after reporting strong earnings in early November. The company's revenue grew 26% year-over-year to $690 million, surpassing the consensus estimate of $664 million. Non-GAAP operating income was $172 million, reflecting a 25% margin, while free cash flow came in at $204 million with a 30% margin, exceeding expectations by $38 million. The company has also seen a rising contribution from AI-native customers, with AI-related annual recurring revenue (ARR) now accounting for 6% of the total, up from 4% in Q2. As a result, Datadog raised its full-year revenue guidance to $2.64 billion-$2.65 billion, representing 25% year-over-year growth, while maintaining an operating margin of around 25%.

Datadog's success can be attributed to its efficient "land and expand" strategy, which emphasizes multi-product adoption and signals its evolution into a comprehensive platform rather than just a product. This strategy has helped Datadog build one of the most efficient go-to-market (GTM) models, with product-led growth that minimizes service overhead by providing immediate value to customers. The company is heavily investing in platform development, with a significant portion of its engineering team focused on ensuring integration across monitoring and security features. The growing importance of AI for Datadog is evident, with new products like Bits AI and LLM Observability positioning the company to capitalize on the accelerating cloud migration. Furthermore, Datadog's introduction of the On-Call product, which integrates incident management into its observability platform, has seen strong early adoption, indicating potential disruption for competitors like PagerDuty as customers consolidate onto platforms like Datadog.

Despite these strong fundamentals, the stock's recent surge feels overextended, with Datadog now trading at a $50 billion valuation based on $4 billion in expected revenue for FY26. The stock is priced at 11x forward revenue and 45x FY26 free cash flow (FCF), making it a potentially expensive investment at current levels. Even with optimistic growth projections, such as a 25%+ compound annual growth rate (CAGR) and high FCF margins leading to $2.6 billion in FCF by FY28, the stock would still require a 30x FCF multiple to generate double-digit returns. Thus the company seems overvalued due to the recent rally driven more by momentum than by fundamentals catching up.