Datadog's stock is soaring. Here's how the company became such a crucial AI player.

By Hannah Pedone

AI is adding complexity to corporate systems, boosting demand for software that helps monitor security and outages

Shares of Datadog were up 29% on Thursday morning.

Datadog has become a go-to cybersecurity provider by playing into an area that artificial-intelligence companies need now more than ever.

That momentum showed up big-time in Datadog's (DDOG) latest earnings, helping to send shares up more than 29% in morning action - a move that will constitute a record gain if it holds through the close.

Datadog's strength revolves around observability, which is all about "providing context to the state of every part of the business including performance regressions, outages, or issues concerning security and compliance," according to the company's website.

As AI spurs higher data volumes, corporate systems are becoming more complex, driving up interest in Datadog's monitoring services, Cantor Fitzgerald analyst Thomas Blakey wrote in a note.

Observability has become a lucrative niche in the software industry, helping Datadog stand out as an AI darling at a time when there are more general concerns around how software companies will hold up in the AI era.

On Thursday, the company beat earnings expectations and raised full-year guidance on both revenue and adjusted earnings per share.

It now expects revenue of between $4.3 billion and $4.34 billion, up from a projected range of $4.06 billion to $4.1 billion. Datadog is also calling for adjusted earnings per share of $2.36 to $2.44 for the full year, whereas it was previously projecting $2.08 to $2.16.

Read more: Fortinet's stock rockets higher as earnings help dispel fears of AI disruption

Datadog CEO Olivier Pomel talked up the company's work with a Fortune 500-size insurance client. That company's "fragmented" observability stack was leading to long outages, causing customers to report incidents. Datadog's incident-detection systems and broader observability platform helped address those issues, Pomel said on the earnings call.

Management noted on the call that the company has recently signed major deals including a seven-figure arrangement with an online recruiting platform. It also said it has new partnerships with hyperscalers, hedge funds, banks and the federal government.

Monness, Crespi, Hardt & Co. analyst Brian White wrote in a note that because Datadog is a cloud-native platform, it is able to piggyback on the health of the three biggest cloud providers, which also offer a window into the demand environment for the company's services.

See also: Software stocks are finally priced for a comeback, this veteran strategist says. He's buying.

-Hannah Pedone

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05-07-26 1129ET