Datadog and Cloudflare: The Hidden Value in Usage-Based Software
Datadog and Cloudflare: The Hidden Value in Usage-Based Software
Palantir trades at 40 to 50 times price-to-sales. Datadog, doing remarkably similar work, trades at 10 times.
When I first noticed this gap, I assumed I was missing something — or the market was. The deeper I looked, the more it seemed like the latter. And in the same vein, Cloudflare is another name the market is underpricing.
TL;DR Datadog (DDOG) and Cloudflare (NET) have business models where revenue grows as AI agent usage increases. Datadog's valuation discount versus Palantir is 4 to 5 times, and catalysts include the Sakana AI partnership and Cloudflare's "next-generation internet" vision.
1. Datadog (DDOG): The Data Refinery
If data is oil, pulling it out of the ground is the easy part. Refining it, transporting it, and turning it into something useful — that is where the real value sits. Datadog does exactly this for enterprise data.
It unifies application, security, and infrastructure data into a single dashboard, transforming raw information into actionable insights. This "single pane of glass" observability system is Datadog's core value proposition.
Key numbers:
- Revenue growth approximately 20% this year, another 20% projected next year
- EPS growth only 6% this year, but expected to jump to $2.64 next year
- Market cap roughly $46 billion on ~$4 billion expected revenue → P/S around 10x
The Palantir disconnect is the story. Ask anyone inside Palantir, and they will tell you the real value is not the AI — it is the data organization. They go into companies, get into every nook and cranny to structure the data, and then point AI at it. Pointing the AI is easy. Structuring the data is the hard part.
What Datadog does is analogous at the strategic level — focused on enterprise clients rather than government, operating at the strategic tier rather than the operational.
Recent catalyst: Datadog announced a strategic partnership with Sakana AI to deliver advanced AI-plus-observability for enterprises. This directly addresses the main criticism — that Datadog lacked AI capabilities. The partnership positions it to deliver Palantir-like value at the strategic level for enterprise customers.
2. Cloudflare (NET): Architect of the Next Internet
Cloudflare is in the business of making the internet itself work better.
It started with website firewalls. Then website hosting. Now it has expanded into a full cloud platform competing with Google Cloud, Microsoft Azure, and AWS.
What makes Cloudflare compelling in the AI era is its diagnosis of the problem. The internet runs on technology from the 1960s and 1980s. AI agents scraping websites, pulling data, and performing actions on behalf of users represent a load the internet was never designed to handle.
Cloudflare's vision is to build the next version of the internet — infrastructure where AI agents and humans coexist. Because it charges on a usage-based model, more AI traffic means more Cloudflare revenue. AI is not going to make the internet less busy, so the structural positioning is clear.
3. The Common Thread: Usage Equals Revenue
The shared investment logic for Datadog and Cloudflare is straightforward:
- Usage-based pricing → they get paid whether a human or an AI agent generates the activity
- AI agent tailwind → agents processing more data and using more internet means higher revenue
- Overcorrected in the software selloff → there is no reason to discount these at the same rate as per-seat companies
| Stock | P/S | AI Agent Position | Differentiating Catalyst |
|---|---|---|---|
| Datadog (DDOG) | ~10x | Data observability → benefits as AI uses more | Sakana AI partnership, Palantir discount |
| Cloudflare (NET) | Premium | Internet infrastructure → AI traffic beneficiary | "Next-gen internet" vision, cloud expansion |
| Palantir (PLTR) ref. | ~40-50x | Data structuring + AI | Government contract premium |
What the Market Is Missing
The biggest distortion created by the software selloff is the failure to distinguish pricing models. Discounting per-seat companies and usage-based companies at the same rate is irrational.
The gap between Datadog at 10x P/S and Palantir at 40 to 50x is difficult to justify. The Sakana AI partnership could be the catalyst that narrows it. Cloudflare is a direct beneficiary of the internet traffic explosion that AI agents are creating.
Both were sold because they are labeled "software," but both have structures that generate more revenue as AI usage increases. When the market starts differentiating pricing models, these two are among the first names that get repriced.
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