Investment

A Once-in-a-Generation Investment Opportunity: 1 Artificial Intelligence (AI) Growth Stock to Buy Now and Hold Forever

Artificial intelligence (AI) is still a nascent technology, but it will weave its way into more products and experiences in the years ahead. In doing so, AI will undoubtedly become a multitrillion market, reshaping businesses and even entire industries in the process.

Wedbush analyst Dan Ives recently wrote, “[W]e believe the stage is set for a ‘1995 moment’ as AI is the most transformational technology we have seen since the internet started to take shape.” That points to tremendous value creation, so much so that investors should view AI as a once-in-a-generation opportunity.

The most prudent way to capitalize on that opportunity is to build a basket of AI stocks, and Datadog (DDOG 1.75%) deserves a place in such a basket. Here’s why.

Datadog is a leader in observability software

Datadog provides observability and cybersecurity software for development, operations, and security teams. Its platform includes dozens 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 ecosystems. The Datadog platform also leans on AI to automate incident investigation and remediation.

Datadog has received praise from several industry experts. Consultancy Gartner views the company as a leader in application performance monitoring, due in part to its broad product portfolio. Similarly, Forrester Research sees the company as a leader in AI for IT operations because its platform offers unparalleled data insights and visualizations.

Datadog also enjoys a strong presence in several other observability verticals. That includes cloud infrastructure monitoring, log monitoring, network monitoring, and server monitoring, among others. To quote Morgan Stanley, “Datadog has positioned itself as the leading observability platform for the most modern cloud environments.”

That prolific market presence is proof of a winning strategy. Datadog offers a broad suite of integrated software, so it can land customers in a variety of ways and expand its relationship with those customers over time. Its ability to consolidate observability and security workflows is particularly compelling for organizations looking to reduce operational complexity and eliminate unnecessary vendors.

Ultimately, that value proposition has led to consistently strong top-line growth. Quarterly revenue notched a compound annual growth rate of 52% over the last three years, as shown in the chart below.

Chart showing Datadog's quarterly revenue over the last three years.

Chart by author.

To add context, Datadog is unlikely to grow revenue at 52% annually in the future. Indeed, revenue growth slowed to 25% in the most recent quarter. But that figure could certainly reaccelerate as business spending improves under more favorable economic conditions, especially since Datadog is positioning itself to benefit from AI spending.

Datadog is positioned to be a key enabler of AI

Observability software becomes increasingly important as IT environments become more complex. That means trends like cloud migration and AI adoption are tailwinds for Datadog. Presently, many businesses are using generative AI to build applications for data analysis, intelligent search, and media content creation.

Datadog provides integrations that help businesses monitor each layer of the AI stack, including infrastructure, like Nvidia graphics processing units; data storage solutions, like vector databases; model deployment tools, like Amazon SageMaker and Vertex AI by Alphabet‘s Google; and large language models (LLMs).

Those integrations are useful when businesses want flexibility in building custom monitoring solutions, but some businesses prefer a prebuilt product. For those customers, Datadog recently launched LLM Observability, a software module that helps businesses monitor the performance of generative AI applications and the underlying LLMs.

Finally, Datadog recently debuted Bits AI, a natural language interface that leans on generative AI to automate workflows related to incident investigation and remediation. In other words, Bits AI is a copilot that helps development and operations teams work more productively.

Certain Wall Street analysts see substantial upside in those new integrations and products. For instance, Morgan Stanley analyst Sanjit Singh recently named Datadog one of the software companies best positioned to benefit from generative AI. Similarly, Wolfe Research analyst Alex Zukin believes Datadog could become “the fastest growing software company” as the generative AI movement continues gaining momentum.

Datadog stock currently trades at a reasonable price

Datadog sees its addressable market in observability software growing at 11% annually to reach $62 billion by 2026. However, the company should outpace that figure by a wide margin, given its strong market presence and rapid development of generative AI tools. Indeed, Morningstar analysts expect Datadog to increase sales at 31% annually over the next five years.

In that context, its current valuation of 20 times sales is tolerable, especially when the three-year average is 31 times sales. Investors should feel comfortable buying a small position in this growth stock today, provided they plan to hold those shares for at least five years. Additionally, investors should remember that building a basket of AI stocks is the most prudent strategy.

John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Trevor Jennewine has positions in Amazon and Nvidia. The Motley Fool has positions in and recommends Alphabet, Amazon, Datadog, and Nvidia. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

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