Datadog DDOG and Elastic ESTC are at the forefront of the observability market, helping businesses navigate the growing complexity of modern IT environments. As companies accelerate digital transformation, the surge in cloud-native applications is driving unprecedented data growth, and with it, the need for real-time insights.

Observability platforms play a vital role in ensuring performance, reliability, and security across these dynamic ecosystems. With AI-driven analytics and continuous monitoring capabilities, both Datadog and Elastic are competing to define the future of this space. 

Let’s dive into the core fundamentals and key growth drivers behind each company to determine which stock presents a more compelling long-term investment opportunity in the cloud observability space.

The Case for Datadog Stock

Datadog continues to expand its customer base, now exceeding 30,000, with solid adoption among cloud-native enterprises. However, the company still has significant room to grow, as more than half of its customers have yet to adopt all three core observability pillars.

To address growing demand for AI-native capabilities and concerns around observability costs, Datadog has introduced several new offerings, including LLM Observability and Flex Logs. These initiatives mark the company’s effort to stay competitive in an evolving observability landscape. 

However, Datadog is facing rising operating expenses. In the fourth quarter of 2024, research and development costs rose 29.4% year over year to $211.6 million, sales and marketing expenses climbed 31.3% to $173.3 million, and general and administrative costs increased 29.6% to $38.7 million. This trend is expected to continue through 2025, potentially weighing on profitability in the near term.

While the company secured high-value contracts, including a seven-figure deal with a major U.S. bank using Flex Logs to cut log management costs, competitive pricing pressure is increasing. Datadog’s premium model, particularly for data-heavy workloads, may face headwinds as enterprises seek more cost-efficient observability solutions.

The Zacks Consensus Estimate for the first quarter of 2025 earnings is pegged at 42 cents per share, which has remained unchanged over the past 60 days, indicating a 4.55% year-over-year decline. The consensus mark for revenues is pinned at $739.37 million, implying year-over-year growth of 20.96%.

Image Source: Zacks Investment Research

See the Zacks Earnings Calendar to stay ahead of market-making news.

The Case for Elastic Stock

Elastic is benefiting from solid top-line growth which increased 17% year-over-year in the third quarter of fiscal 2025, driven by 26% growth in cloud revenues. The company also achieved a non-GAAP operating margin of 17%, reflecting strong execution and improving profitability.

Product innovation remains a key growth driver for ESTC. In the third quarter of fiscal 2025, Elastic announced the general availability of Elastic Cloud Serverless on AWS and a technical preview on Azure, with full availability expected soon. The company also recently announced the general availability of its integration with Google Cloud’s Vertex AI platform in Elastic Observability. The integration introduces LLM observability support for models hosted in Vertex AI, offering visibility into costs, token usage, errors, prompts, responses, and performance.

Elastic further expanded its observability value proposition through a partnership with Tines, integrating Tines Workflow Automation into the Elastic Search AI Platform. The combined offering simplifies security and observability workflow automation, equipping security teams with security orchestration, automation and response. With over 1,460 customers now spending more than $100,000 annually and observability contributing approximately 40% of new business, Elastic is positioned to scale its footprint in cloud-native enterprises while maintaining product differentiation and operational leverage.

The Zacks Consensus Estimate for the fourth quarter of fiscal 2025 earnings is pegged at 37 cents per share, which has remained unchanged over the past 30 days, indicating 76.19% year-over-year growth. The consensus mark for revenues is pinned at $380.28 million, implying year-over-year growth of 13.52%.

Image Source: Zacks Investment Research

Stock Price Performance and Valuation of DDOG and ESTC

In the trailing 12 months, DDOG shares have lost 27.1%, underperforming the decline of 16% in ESTC shares. Shares of DDOG and ESTC have underperformed the Zacks Internet – Software industry’s growth of 7.3%.

ESTC Outperforms DDOG in 1-Year

Image Source: Zacks Investment Research

From a valuation perspective, Elastic's forward 12-month P/S ratio of 5X, while slightly higher than the Zacks Internet – Software industry average of 4.46X, is significantly more attractive than Datadog's 9.43X. This indicates that Elastic offers better relative value for investors seeking exposure to the cloud observability market.

ESTC’s Valuation Is Attractive Than DDOG

Image Source: Zacks Investment Research

Why Elastic Offers a Better Investment Opportunity

Elastic offers a more compelling investment opportunity than Datadog due to its balanced growth, improving margins, and a relatively more attractive valuation. While Datadog leads in scale, it faces rising operating costs and pricing pressure in a highly competitive observability market. Elastic, by contrast, is delivering strong cloud revenue growth, expanding its AI-native capabilities, and securing high-value enterprise deals with a more cost-efficient and flexible platform. This makes Elastic the smarter pick for investors seeking sustainable growth in the cloud observability space. ESTC currently carries a Zacks Rank #2 (Buy), whereas DDOG has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Elastic N.V. (ESTC) : Free Stock Analysis Report

Datadog, Inc. (DDOG) : Free Stock Analysis Report

This article originally published on Zacks Investment Research (zacks.com).

Zacks Investment Research