Datadog Q1'26: AI-native and Core Cloud Demand Drive Stronger-Than-Expected Growth Together

Overview

This report is Bernstein's commentary on Datadog Inc Q1'26 results. The key conclusion is that Datadog benefits from both rapid expansion of AI-native customers and a rebound in core cloud workloads, with Q1 results, Q2 guidance, and full-year revenue raises all significantly beating expectations. The report maintains Outperform and raised the target price to USD 180.

Core views

Datadog's growth is not coming only from a few large AI labs, but from broader AI innovation firms and traditional enterprises' AI product build-out demand. AI-native customers continue to expand in number, scale, and depth of product adoption. Among non-AI-native customers, AI-driven demand shows up as increases in compute, storage, network, and third-party API usage, which lifts overall cloud consumption. The report believes short-term churn risk is limited, but over the long term it remains necessary to watch for the possibility that large customers internalize part of the capability as their business matures.

Analysis framework

The report combines company disclosures, management callbacks, Bernstein's leading-indicator analysis of AWS web traffic, customer ARR stratification, NRR estimates, multi-product adoption trends, and valuation models to assess Datadog fundamentals and the target price. Valuation is based on a 50/50 blend of DCF and P/S multiple methods, with DCF assumptions of 11% WACC and 3% terminal growth, and a P/S multiple around 14x NTM Revenue.

Methodology notes

• Valuation methodsDCF and 50/50 P/S Multiple Valuation

  The target price is derived from averaging DCF and a forward 5-8 quarter P/S comparable multiple.

  The report used a DCF with 11% WACC and 3% perpetual growth, and combined it with a SaaS comparable multiple of about 14x NTM Revenue to raise the target price to USD 180.

• Growth TrackingAWS Web Traffic Leading Indicator

  AWS web traffic is used as a leading indicator for Datadog core revenue growth.

  Bernstein believes AWS web traffic has historical directional significance for AWS ex-AI next-quarter sequential revenue and can help gauge Datadog's core revenue growth trend.

• Customer Quality AnalysisLayered ARR and NRR Analysis

  Growth quality is assessed through net additions of customers with ARR above USD 100,000, AI-native revenue share, and Total NRR/Ex-AI NRR.

  The report estimates Total NRR has risen to the low-120% to mid-120% range and AI-native customers account for about 12% of revenue, indicating platform penetration and usage expansion are still strengthening.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• Datadog Inc (DDOG.US)

  Research target; cloud observability and SaaS platform company

  Strengths

  Q1'26 results and guidance were strong, AI-native customers added meaningful ARR, net additions of customers with ARR above USD 100,000 accelerated, multi-product adoption improved, and core cloud consumption growth was close to 26% YoY.

  Weaknesses

  Valuation is elevated, with target price at USD 180 versus a close of USD 188.73; a portion of AI-related revenue is not precisely decomposable, and the long-term growth model still assumes eventual deceleration to low single digits.

  Comparison

  Relative to core SaaS peers, the report applies a Rule-of-40 related cloud SaaS regression framework and an approximate 14x NTM Revenue multiple for valuation; the rating benchmark is 12-month relative performance versus the S&P 500.

  Risks

  Macroeconomic pressure, heightened competition, lower-than-expected operating leverage, execution errors, an upside/downside miss, and major customers potentially internalizing part of capabilities over time.

Key data

• Q1'26 Beat+5.1%Measured by the midpoint of revenue guidance/expectation and represents the largest Q1 beat since the pandemic.
• Born-in-AI Sequential Revenue Contributionabout +USD 15 millionEstimated by Bernstein, still modestly accelerating YoY from a high base.
• Born-in-AI ARR Incrementclose to +USD 200 millionThe model incorporates a short-term incremental ARR contribution of about USD 200 million.
• Core Customer Growthclose to 26% YoYThe company disclosed non-AI revenue growth in the mid-20% range.
• Net Additions of Customers with ARR Above USD 100,000+240The strongest Q1 since 2022.
• AI-native Large Customers22 customers with ARR above USD 1 millionAlmost all use more than 10 Datadog products, and all but one also use the three major observability pillars.
• Q1'26 GAAP RevenueUSD 1,006,426 thousand, up 32% YoYFrom the report table.
• Target PriceUSD 180Derived from averaging DCF and P/S multiple valuations.
• Current PriceUSD 188.73Close date was 2026-05-07.

Impact & implications

The investment implication for DDOG is tilted positive: AI-native customers are not only bringing incremental revenue, but also showing deep product adoption and platform stickiness; rebounding core demand suggests Datadog is not a single AI-justified trade, but a beneficiary of a broader cloud consumption cycle. However, with the stock already above target price, the high valuation makes execution misses, competitive pressure, and growth deceleration more sensitive.

Risks

• Large customers such as OpenAI may adjust Datadog usage in the future, but the report does not view this as a near-term key risk.
• Large technology or consumer internet clients may internalize some observability capabilities after their businesses mature, creating a long-term tail risk.
• Competitors with deep pockets may intensify industry competition.
• If operating-cost economies of scale are weaker than expected, margin expansion may be slower than expected.
• At current valuation levels, execution misses or earnings disappointments may lead to significant downside.

What to watch

• AI-native revenue mix, ARR increments, and the number of customers with ARR above USD 1 million.
• Net additions of customers with ARR above USD 100,000 and average ARR change.
• Whether Total NRR and Ex-AI NRR continue to improve.
• Whether AWS web traffic and core cloud consumption remain strong.
• Whether OpenAI or other large AI customers show usage adjustments.
• Whether FedRAMP and public sector revenue start to improve from a base below 1%.