Datadog (DDOG) shares surged more than 11% in morning trading on Thursday following S&P Global's announcement that the software company will soon be added to the S&P 500 Index ($SPX). The move is set to take effect before the market opens on July 9, with Datadog replacing Juniper Networks, which exits the index following its acquisition by Hewlett Packard Enterprise (HPE).

This development marks a significant milestone for Datadog. The company’s inclusion in the S&P 500 signals that it has reached a certain level of size and stability. For many institutional investors and index-tracking funds, it also means it’s time to buy. These funds are required to adjust their portfolios to reflect the benchmark, often resulting in a short-term spike in share price, as we’re currently seeing with Datadog.

Datadog, known for its monitoring and security platform for cloud-based applications, has a strong underlying business. DDOG continues to expand its customer base, with more clients adopting multiple products. Its investments in artificial intelligence (AI) are also showing promise and could play a key role in sustaining long-term growth.

While the S&P 500 inclusion provides Datadog stock with a temporary boost, its solid fundamentals, growing customer base, and strong bookings are likely to continue driving its share price higher.

Datadog Shows Strong Momentum

Datadog delivered a strong start to the year, showing continued momentum in both customer growth and product adoption, which will support future growth. In Q1, Datadog posted a 25% year-over-year increase in its top line and surpassed the Street’s forecast.

Customer growth remains a key strength for Datadog. The company ended the quarter with approximately 30,500 customers, up from 28,000 a year ago. Notably, the number of high-value customers, those generating over $100,000 in annual recurring revenue (ARR), jumped to 3,770, accounting for 88% of total ARR. This growth reflects Datadog’s increasing traction with large enterprises.

Datadog’s focus on expanding its platform usage among existing customers is paying off well. More clients are using multiple Datadog products than before. For instance, 83% are now using at least two products, and 51% are using four or more. Remarkably, 13% are now using eight or more, up from 10% the previous year. This multi-product engagement boosts revenue per customer and reflects the platform’s deep value and stickiness among users.

New products are supporting its growth. Flex Logs, Datadog’s new log management tool, has surpassed $50 million in ARR just 18 months after launch. Customers adopting Flex Logs are adding new use cases and increasing their overall spending across Datadog’s platform, showcasing the product’s market opportunity. Another rapidly growing product, Database Monitoring, is also nearing the $50 million ARR mark and is expanding at a 60% year-over-year pace. Over 5,000 customers have adopted this product, reflecting Datadog’s growing role in database observability and application performance.

Bookings are another bright spot for the company. Datadog reported a surge in new customer wins and large deals in the first quarter. Bookings from new customers increased by over 70% year-over-year, and the company signed 11 deals worth $10 million or more in total contract value (TCV), representing a substantial jump from the year-ago period. Customer retention also remains solid. Gross revenue retention continues to trend in the mid-to-high 90% range, which is a positive sign.

AI is another frontier that Datadog is leaning into to support future growth. The number of customers using Datadog’s AI integrations has doubled over the past year, now topping 4,000. With the growing demand for large language model (LLM) observability, Datadog’s capabilities in end-to-end AI monitoring are gaining traction.

In addition to organic growth, Datadog is focusing on acquisitions. The recent acquisitions of Eppo and Metaplane are expected to strengthen Datadog’s capabilities and accelerate its growth.

The Bottom Line: Should You Buy Datadog Stock?

Datadog’s growing product adoption, strong customer growth, and advancements in AI all point to a company gaining momentum. These factors make it an attractive option for long-term investors.

Wall Street analysts are bullish on Datadog stock, maintaining a “Strong Buy” consensus rating.