Investing.com -- UBS upgraded Datadog (NASDAQ:DDOG) to Buy from Neutral on Friday, citing signs of improved IT spending and strong prospects in the cloud infrastructure sector.
In a note, UBS analysts expressed optimism about medium-term growth trends for AWS and Azure, which could positively impact Datadog’s performance.
“We believe these trends could help Datadog maintain or even modestly accelerate its mid-20% growth rate in the coming quarters,” the analysts wrote.
UBS sees the potential for Datadog’s revenue growth estimates to increase, projecting growth of 26% for 2025, well above the 23% consensus forecast.
"While Datadog shares aren’t cheap at 10x 2026e revenues and 34x 2026e free cash flow, we believe there is upside if 2025/26 revenue growth estimates move up to the 25-30% range," UBS added.
Feedback from industry checks on Datadog’s third-quarter results was mixed, but UBS did not observe new pressures affecting the company.
“Most checks cited Datadog (and to a lesser extent Dynatrace (NYSE:DT)) as a share gainer in the observability space,” the report noted.
UBS highlighted Datadog's evolving pricing strategy, explaining that while the company remains relatively inflexible on price, it has shown some flexibility by restructuring contracts into lower-priced tiers with higher commitment levels.
Datadog shares have surged 10% so far in October, as investor confidence has improved alongside positive economic indicators and stable interest rates.
UBS expects increased interest in “cloud usage” stocks, such as Datadog, Snowflake (NYSE:SNOW), and MongoDB (NASDAQ:MDB), given the positive demand outlook for AWS and Azure.
"Datadog is already viewed by many investors as the ‘cleanest’ cloud usage story, it is our preferred way to play a demand recovery," the note stated.
UBS raised its price target for Datadog from $125 to $150, reflecting a valuation of 12.3x 2026 revenue estimates. “We conclude that valuation is reasonable at current levels,” UBS wrote.