Even though major U.S. stock market indexes like the S&P 500 and the Nasdaq Composite continue climbing to new highs, not every individual stock is following along.

Datadog (DDOG -5.23%) stock is still trading 33% below its record level from 2021. It was unquestionably overvalued back then, but it's starting to look attractive thanks to the company's rapid revenue growth, soaring profits, and expanding portfolio of artificial intelligence (AI) products.

In fact, The Wall Street Journal tracks 46 analysts who cover Datadog stock, and the majority have assigned it the highest-possible buy rating, with not a single analyst recommending to sell.

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Critical tools for businesses and AI developers

Datadog's flagship cloud observability platform helps businesses monitor their digital infrastructure, alerting them to technical issues so they can be fixed before they impact the customer experience. For instance, a game developer might be unaware that users in one country are having issues logging in until they notice a sharp drop in activity. By that point it's too late because customers are already upset -- but with Datadog, the problem would have been identified immediately.

The company is expanding its product portfolio and entering new industries like AI. It launched an observability tool last year specifically for large language models (LLMs), which sit at the foundation of every AI software application. The tool helps developers rapidly identify errors in their models, track costs, and even evaluate the quality of their outputs to ensure they are delivering the best responses to users.

Datadog also offers an AI-powered virtual assistant called Bits AI to enhance its observability tools. It allows businesses to trace technical issues to their root cause with a simple prompt, and it can even generate incident summaries, which reduces the amount of time human managers need to spend conducting manual investigations. Bits AI can integrate with workplace collaboration platforms like Slack, where it can send detailed alerts to key employees as soon as issues arise.

Around 30,000 businesses were using Datadog at the end of 2024, and 3,500 had adopted at least one of its AI products. That represented a big jump from the 2,000 businesses that were using its AI products at the beginning of the year.

Strong AI revenue and soaring profits

Datadog generated $738 million in revenue during the fourth quarter of 2024, which was a 25% increase from the year-ago period. It was also significantly above management's forecast of $711 million.

David Obstler, Datadog's chief financial officer, said AI customers accounted for about 6% of the company's annual recurring revenue (ARR) during the quarter. It might not sound like much, but the figure has doubled since the fourth quarter of 2023, when it was 3%. Since Datadog ended 2024 with a record $3 billion in total ARR, it won't be long before AI becomes a critical part of the business.

The company also made significant progress at the bottom line throughout last year, proving to investors it can generate strong top-line growth while also operating profitably. Its total generally accepted accounting principles (GAAP) net income for 2024 came in at $183.7 million, representing a whopping 278% jump from 2023.

The picture looks even better from a non-GAAP (adjusted) perspective. After excluding one-off and noncash expenses like acquisition costs and stock-based compensation, Datadog actually generated $653.8 million in net income during 2024, which was up 40.9% compared to 2023.

Wall Street is bullish on Datadog stock

Of the 46 analysts tracked by The Wall Street Journal, 29 have assigned the highest-possible buy rating to Datadog stock. Six others are in the overweight (bullish) camp, and the remaining 11 recommend holding. No analysts recommend selling.

Their average price target for the next 12 to 18 months is $161.74, implying a potential upside of 26% from where the stock trades as of this writing. However, the Street-high target is $230, suggesting the stock could soar by as much as 80%. How realistic are those targets?

2024 was only Datadog's second profitable year (on a GAAP basis) in its history as a public company. Judging by the incredible growth in its net income, there could be some volatility at the bottom line until management strikes a comfortable balance between generating revenue growth and profits. As a result, it isn't very useful to value Datadog stock using the traditional price-to-earnings (P/E) ratio just yet.

We can use the price-to-sales (P/S) ratio instead, which divides a company's market capitalization by its annual revenue. Datadog stock trades at a P/S ratio of 16.9 as of this writing, which is a significant discount to its long-term average of 28.9. However, that average is somewhat skewed by the 2021 period when -- as I mentioned earlier -- the stock was highly overvalued:

DDOG PS Ratio data by YCharts

I'm not suggesting Datadog stock is expensive or unattractive at the current level -- its P/S ratio is clearly at the lower end of its range dating back to 2020. However, it is a little pricier than other cloud and AI software stocks like Confluent, Microsoft, and DigitalOcean at the moment.

As a result, circling back to Wall Street's price targets, I think a 26% gain is a more realistic expectation over the next year. In my view, delivering an 80% gain would require a monumental acceleration in the company's revenue growth.