DDOG: BitsAI, A Hidden AI Agent Play?

Datadog’s share price has corrected sharply since late 2024 on fear of its largest customer OpenAI cutting off from them, and has fully recovered since bottoming in April. The strong rebound was partially driven by the stabilized relationship with OpenAI, tailwind from AI agent adoption, as well as the unexpected S&P500 index inclusion. We sense that market has been desperate to find another AI winner in infra software space besides SNOW, and DDOG has become a ideal candidate as AI agents bring create new demand for observability. However, today we would like to discuss another overlooked AI tailwind to DDOG: its new Bits AI agent offering. Our research shows that, despite early, Bits AI could expand a whole new TAM for DDOG, potentially boosting its revenue growth as well as multiple re-rating.

Datadog and OpenAI

Before diving into our formal analysis, let's discuss Datadog and OpenAI.

We previously noted in our Snowflake report that OpenAI has been implementing a Grafana/Clickhouse + Clickhouse/SNOW/Databricks architecture to replace Datadog. By late last year, they were pushing for a complete transition, but this triggered significant outage. Consequently, the replacement pace has slowed, though the migration efforts continue. This makes Guggenheim's research report from yesterday particularly valuable. From an investment perspective, once the OpenAI risk factor is fully priced in, Datadog presents a more compelling opportunity.

What’s Bits AI?