Semiconductor company Nvidia (NVDA 6.18%) sits at the heart of the artificial intelligence (AI) revolution. Analysts estimate its market share in machine learning processors to be between 80% and 95%, and the chipmaker reinforced its authority by branching into AI software and cloud services. Investors have recognized Nvidia's success and pushed its stock price up 250% in the last year. The company is now worth north of $1 trillion.

When you factor in the law of large numbers, it suggests that other, smaller stocks offer more upside potential at this point than Nvidia. That's just one of the reasons investors should consider Datadog (DDOG 4.95%) instead.

Morgan Stanley analyst Sanjit Singh sees Datadog as one of the software companies best positioned to benefit from generative AI, and Wolfe Research analyst Alex Zukin believes Datadog could become the "fastest-growing software company" amid the AI boom.

Here's what investors should know about AI growth stock Datadog.

Datadog is a leader in AI for IT operations

Datadog specializes in observability and cybersecurity software for development, operations, and security teams. Its platform collects data from across the enterprise technology stack to provide real-time visibility into applications, networks, and infrastructure, helping clients identify and resolve performance problems and security threats.

The Datadog platform also leans on artificial intelligence (AI) to detect anomalies, automate root cause analysis, and surface contextual insights, all of which accelerate investigative workflows. Prowess in data science won Datadog recognition as a leader in AI for IT operations from Forrester Research. The company also distinguished itself as a leader in other software verticals, including application performance monitoring, log monitoring, and network monitoring.

Despite difficult macroeconomic conditions, Datadog reported solid financial results in the second quarter. Its customer count increased 23% year over year to 26,100, and the average customer spent north of 20% more over the past year. In turn, second-quarter revenue increased 25% year over year to $510 million, and non-GAAP (generally accepted accounting principles) net income climbed 50% to $125 million.

Going forward, investors have good reason to believe Datadog can maintain (or even accelerate) its growth trajectory. Its platform includes over two dozen products, but only 21% of customers use six (or more) of those products, creating a substantial upsell opportunity. The broad scope of the Datadog platform is also a persuasive lure for new customers, especially those looking to consolidate observability spend through a single vendor.

On that note, management sees its market opportunity rising from $45 billion in 2023 to $62 billion in 2026, and growing demand for AI should be a powerful tailwind for the company.

Datadog is leaning into artificial intelligence

Any technology that makes corporate IT environments more complex makes performance monitoring more critical, so Datadog stands to benefit greatly from growing adoption of AI. The company is leaning into that tailwind with recently announced integrations and products, including Bits and LLM Observability.

Bits is a generative AI assistant that expedites the resolution of performance problems. Its conversational interface makes it easy for clients to gather insights and investigate issues. Bits can also suggest automated code fixes and trigger relevant workflows to accelerate remediation.

LLM Observability is a monitoring solution for large language models (LLMs). It helps clients detect and resolve problems like model hallucinations and model drift, terms that refer to nonsensical outputs and performance degradation, respectively, in generative AI applications.

More broadly, the Datadog platform supports end-to-end monitoring of the AI stack. Its platform integrates with infrastructure from vendors like Nvidia, vector databases like Pinecone, model development tools like Amazon SageMaker, and AI models themselves like LLMs from OpenAI.

Why Datadog stock is worth buying

Whether Datadog becomes the fastest-growing software company is somewhat irrelevant, though that commentary from Zukin certainly hints at high conviction. What actually matters is that Datadog has a strong presence in a large and growing market, and investors can confidently expect annual revenue growth in the mid-20% range in the coming years.

Indeed, Morgan Stanley forecasts annual revenue growth of 25% for Datadog through 2025. That makes its current valuation of 14.5 times sales look reasonable, and that multiple is certainly a bargain compared to the three-year average of 33.9 times sales. Risk-tolerant investors should consider buying a small position in this growth stock today.