Investing.com -- Guggenheim Securities upgraded Datadog to Buy from Neutral on Wednesday, setting a $175 price target that implies roughly 50% upside from current levels, calling the cloud monitoring company "a primary beneficiary of AI-driven growth" in data volumes and IT complexity.

Shares in Datadog rose 2.6% in premarket trading by 07:50 ET.

Guggenheim analysts Howard Ma and Joseph DiBartolomeo said their previous hesitation on the stock was due to Datadog’s heavy exposure to OpenAI, which they believe still plans to move entirely off the platform.

But checks indicate that migration is taking longer than expected, buying time for Datadog to build out its AI customer base elsewhere.

The analysts believe an 8-figure deal announced on Datadog’s fourth-quarter earnings call — which they describes as the largest new customer logo in the company’s history — is with Anthropic, part of a broader group of 650 AI-native customers.

Guggenheim now projects Datadog will grow revenue 27% in 2026 to $4.36 billion, roughly 6% above consensus, with an adjusted operating margin of 24.5%, compared to the Street’s 21% estimate.

The forecast includes core business growth of 24%, OpenAI revenue growing about 16%, versus a prior estimate of a 20% decline, and other AI-native customers, including Anthropic, growing 220% year-over-year, adding roughly $160 million.

Looking further out, the analysts see a revenue growth dip to 20% in 2027 as OpenAI’s contribution shrinks to around $150 million before eventually churning, but project a reacceleration to 25% growth in 2028 as Anthropic and other AI-native customers fill the gap.

They estimate Anthropic’s annual recurring revenue (ARR) on Datadog could exceed $350 million by 2028, and see lower churn risk compared to OpenAI given the two companies’ different business profiles.

On the competitive moat, they pointed to Datadog’s purpose-built storage and query engines, including its Monocle metrics database and Husky event engine, as difficult to replicate, pushing back on concerns that open-source telemetry tools or large language models could commoditize the platform.

The analysts also highlighted Datadog’s Bits AI suite, which automates incident detection and response, as a potential new monetization vector, possibly through outcome-based pricing.

"The Bits AI suite is leading in its category and could serve as a new monetization lever for Datadog, perhaps via outcome-based pricing," they wrote.

"AI observability, Bits AI, and sales capacity and productivity increases are all potential levers for upside," the analysts said.