Datadog's AI Upside Faces a 57-Times Cash Flow Test

Datadog's next earnings report carries an unusually high burden of proof. UBS raised its price target to $320 from $280 ahead of the November 4 report, but the same note described limited and mixed enterprise spending checks and a valuation that leaves little room for a routine quarter.

According to Proactive's report on the UBS research, Datadog shares had risen 15% since the company's second-quarter results while the Nasdaq was roughly flat. UBS estimated that the stock traded at 17 times forecast 2027 revenue and 57 times forecast free cash flow. The bank based its new target on 66 times forecast 2028 enterprise value to free cash flow, up from 58 times previously. These are UBS estimates, not company guidance, and the higher multiple makes the target especially sensitive to changes in growth expectations.

The customer checks were encouraging but not decisive. Large enterprises surveyed by UBS expected their future Datadog spending to grow between zero and 10%, yet the bank said the sample was limited and demand views were mixed. UBS also said Datadog and Dynatrace appeared to be the main observability vendors benefiting as corporate software budgets shift toward cybersecurity, data projects and artificial intelligence.

AI observability is software that helps companies monitor the performance, cost and reliability of AI models and applications. UBS said it still represents a small part of Datadog's revenue. One global luxury-goods company, however, told the bank that almost 20% of its Datadog spending was already connected to AI observability. That single customer is evidence of meaningful adoption, not evidence that the same share applies across Datadog's customer base.

Datadog's latest reported results provide the scale behind the debate. Second-quarter revenue rose 36% from a year earlier to $1.12 billion. The company generated $279 million of free cash flow and ended June with $5.0 billion of cash, cash equivalents and marketable securities. It had about 4,720 customers producing at least $100,000 in annual recurring revenue, up 23% from about 3,850 a year earlier. Those figures show broad growth, but the customer count expanded more slowly than revenue, which means continued growth also depends on existing customers using more products and consuming more of the platform.

For the third quarter, management guided to revenue of $1.135 billion to $1.145 billion, non-GAAP operating income of $260 million to $270 million and non-GAAP earnings of $0.63 to $0.65 a share. The company cautioned that it could not reconcile those forward-looking non-GAAP measures to GAAP results without unreasonable effort because stock compensation and related items can vary materially.

UBS sees possible upside from stronger OpenAI spending in the second half of 2026 and from wider adoption of AI monitoring. It also said Datadog's core enterprise revenue growth, currently in the high-20% range by the bank's estimate, could stabilize as comparisons become harder. Investors therefore need more than another target increase. The November 4 report must show whether enterprise usage and AI workloads are growing quickly enough to support a premium multiple without relying on one customer example or a broader enthusiasm for AI software.