Bank of America (BAC) just told clients which software stock it wants to own going into earnings season.
The pick is Datadog (DDOG), the cloud monitoring company that reports second-quarter results on August 6.
BofA named Datadog its top software pick and kept its Buy rating.
That call matters because Datadog is not a cheap stock, and the bank is asking investors to pay up right before a report that could go either way.
Here is what BofA sees, and what still has to happen for the stock to reward the people buying it now.
Why Bank of America picked Datadog before its Q2 earnings
Datadog sells observability software, which is the tooling companies use to watch whether their apps and cloud systems are running correctly.
When a website slows down or an app breaks, observability tools are what engineers use to find the problem.
BofA’s confidence comes from a pattern it found in Datadog’s data.
The bank studied how Datadog’s revenue growth has tracked Amazon Web Services performance over time, and its current second-quarter estimate looks low against that history.
In plain terms, the bank thinks Wall Street‘s number for the quarter may be too conservative.
BofA also flagged three things supporting the call: healthy demand signals, steadier trends around large customer renewals, and stronger positioning in monitoring AI systems.
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The AI angle is the newest part of the argument.
As companies hand more work to autonomous AI agents, they need a way to watch what those agents do when something goes wrong. BofA argues that Datadog is set up to sell exactly that kind of monitoring.
Bank of America named Datadog its top software pick ahead of the company’s second-quarter earnings report.
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What Datadog’s numbers have to show on August 6
Analysts expect earnings of about $0.58 per share on revenue of roughly $1.08 billion, according to Ticker Report.
Datadog’s own guidance calls for revenue between $1.07 billion and $1.08 billion.
For context, revenue grew 32% year-over-year in the first quarter, and management raised its full-year outlook after that report.
The market has already priced in a lot of good news.
Datadog shares closed at $267.97 on July 31, up about 108% over the prior six months. The stock trades near its 52-week high of $278.76, well above its low of $98.01.
That run is the risk. A stock priced for strong results has less room to absorb a weak quarter report.
Datadog has beaten Wall Street’s earnings expectations in each of the past four quarters, which is part of why the bar is set high going in.
How Datadog’s AI customers cut both ways
The AI story that makes Datadog attractive also introduces its clearest risk.
The company counts five customersspendingmore than $10 million on AI-related services, and it recently added two AI-research deals with large cloud providers.
Those wins bring in a lot of revenue, but they concentrate it among a small group of demanding customers.
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BofA addressed the worry directly and called the concern exaggerated.
The bank acknowledged that AI labs might negotiate for better pricing or trim spending when their contracts renew, but it still views the overall trend as positive.
The reason is diversification. Landing more AI research deals spreads Datadog’s exposure across several large accounts instead of leaning on one.
Investors will want to see that spending held up through renewals when the company reports.
Where other analysts stand on Datadog stock
BofA is not alone in turning more positive ahead of the report.
Morgan Stanley and Citi both raised their price targets on Datadog to $300, and Benchmark reiterated a Buy rating with a $330 target, Investing.com reported.
Benchmark said it expects Datadog to exceed consensus.
The bullish case rests on one idea: AI is increasing demand for the kind of monitoring Datadog sells.
That is the same argument driving other software names right now.
Wells Fargo made a similar bet on Snowflake (SNOW), lifting its target to a Street-high $500 on the view that AI agents push customers to spend more.
Datadog fits that outlook. More AI systems in production means more things to monitor.
What this means if you are watching Datadog stock
For readers weighing the stock, the decision comes down to valuation against a high bar.
Datadog has a high price. Its price-to-earnings ratio sits above 650, which means the market is already paying for years of strong growth.
A few things are worth watching on August 6:
What to watch in Datadog’s Q2 report
- Revenue growth rate. BofA wants to see growth hold near or above the 32% pace from the first quarter, according to Investing.com.
- AI customer spending. Whether the largest AI accounts kept spending through their renewals.
- Full-year guidance. Management guided to full-year revenue of $4.30 billion to $4.34 billion, and any change signals its own confidence.
Buying a high-multiple stock right before earnings carries real risk. If Datadog meets expectations without clearly beating them, the shares could still fall, since the market has priced in a strong quarter already.
The safer approach for some investors is to wait for the report, then judge whether the growth rate and AI spending back up the bank’s outlook.
BofA’s call gives Datadog a strong setup into August 6. But the company still has to deliver the numbers that justify the price.