In a market where finding value has become increasingly difficult, one stock stands out for all the wrong reasons—at least on a technical basis. Datadog, the cloud monitoring and security platform, has plunged to an RSI of 16.9, making it the most oversold stock in the entire S&P 500 as 2026 begins.

But for contrarian investors and those willing to look past near-term technical weakness, Wells Fargo sees a golden opportunity. The bank maintains that Datadog is "the clearest and most near-term beneficiary of AI" among cloud software companies, and the recent selloff may have created an attractive entry point.

Understanding the Selloff

Datadog shares have been under significant pressure recently, falling more than 14% over the past month. The decline has pushed the stock's Relative Strength Index (RSI)—a momentum indicator that measures the speed and magnitude of recent price changes—well below the threshold of 30 that typically signals oversold conditions.

An RSI reading of 16.9 is exceptionally low, suggesting the stock may be due for at least a technical bounce. When stocks reach such extreme oversold levels, they often experience mean reversion as selling pressure exhausts itself and bargain hunters step in.

The broader context matters here too. The major averages were listless on Friday, the first trading day of 2026, alternating between gains and losses. For the week, they finished down more than 1% across the board—a decline that tipped certain individual stocks, including Datadog, into oversold territory.

Wells Fargo's Bullish Case

Wells Fargo analyst Ryan MacWilliams remains firmly bullish on Datadog despite the recent weakness. The bank initiated coverage with an Overweight rating in late September 2025 with a $190 price target, and subsequently raised that target to $230 in November while maintaining its bullish stance.

"We view DDOG as the clearest and most near-term beneficiary of AI."

— Ryan MacWilliams, Wells Fargo Analyst

The bull case centers on several key factors that MacWilliams believes the market is underappreciating:

AI-Native Customer Growth

Datadog's broader AI-native customer cohort represents what Wells Fargo calls "an underappreciated growth driver that will become more meaningful in the near future." Run-rate revenue from AI-native customers—excluding OpenAI, which is a major customer—already exceeds $100 million.

This is significant because AI workloads tend to be compute-intensive and generate substantial monitoring and observability needs. As AI-native startups scale and traditional enterprises ramp up their AI initiatives, they require sophisticated tools to monitor cloud infrastructure, track application performance, and manage security—all areas where Datadog excels.

Core Business Durability

Wells Fargo believes that Datadog, excluding the OpenAI relationship, can achieve 20% annual growth through its core Application Performance Monitoring (APM) and Logs products. These offerings serve as "pillars for future growth" as Datadog increases wallet share with existing customers who continue to consolidate vendors.

The vendor consolidation trend is particularly important. As enterprises seek to simplify their technology stacks and reduce the number of point solutions they manage, Datadog's comprehensive platform approach becomes increasingly attractive.

The Broader Analyst Consensus

Wells Fargo's bullish view is not an outlier. The overall analyst consensus for Datadog stock is firmly positive. Out of 54 Wall Street analysts covering the stock, 38 rate it as a Buy, 6 as Hold, and zero as Sell.

The median price target stands at $216, with the highest target at $240 and the lowest at $150. Even at the conservative end, analysts see meaningful upside from current levels.

Recent Fundamentals

Datadog's recent financial performance supports the bullish narrative. In the third quarter of 2025, the company reported revenue of $885.65 million, representing year-over-year growth of 28.4%. That's robust growth for a company of Datadog's size, with a current market capitalization of approximately $66.69 billion.

The company has also demonstrated improving profitability metrics, a crucial consideration as investors have become more focused on earnings quality rather than growth at any cost.

Risks to Consider

While the technical setup and analyst sentiment are encouraging, investors should be aware of potential risks:

  • Customer Concentration: OpenAI is a significant customer, and any changes to that relationship could impact revenue
  • Competition: The observability market is competitive, with players like Splunk (now owned by Cisco), Dynatrace, and New Relic all vying for market share
  • Valuation: Even after the selloff, Datadog trades at a premium multiple relative to the broader software sector
  • Macro Sensitivity: Cloud spending can be cyclical, and any economic slowdown could impact customer budgets

Other Oversold S&P 500 Names

Datadog isn't the only S&P 500 stock flashing oversold signals. Other names in oversold territory include:

  • Lamb Weston: The frozen potato products company has faced headwinds from commodity costs and changing consumer preferences
  • Marathon Petroleum: Energy sector weakness has pressured refining stocks
  • CrowdStrike: The cybersecurity leader has seen profit-taking after a strong 2025 run
  • AutoZone: The auto parts retailer has faced questions about consumer spending durability
  • Lennar: The homebuilder fell 3% in the week prior to 2026 after multiple Wall Street downgrades, including from Bank of America, Evercore ISI, and RBC Capital Markets

The Technical Picture

For technically-oriented investors, the extreme RSI reading creates an interesting setup. Stocks rarely stay at such oversold levels for extended periods. Either fundamentals deteriorate further to justify the selling (possible but not currently evident in Datadog's case), or buyers step in to capitalize on perceived mispricing.

Volume patterns will be important to watch. Trading volumes in oversold S&P 500 stocks have surged 15% week-over-week as of January 2, suggesting heightened activity that could amplify near-term volatility in either direction.

The Bottom Line

Datadog's descent to the most oversold position in the S&P 500 presents a potential opportunity for investors who believe in the company's AI-driven growth thesis. Wells Fargo's characterization of the stock as the "clearest near-term AI beneficiary" among cloud software companies provides a compelling narrative, and the broader analyst community remains overwhelmingly bullish.

However, oversold conditions alone don't guarantee a rebound, and investors should consider position sizing carefully given ongoing market volatility. For those with a medium-to-long-term investment horizon who believe in cloud infrastructure and AI adoption trends, the current technical weakness may indeed represent an attractive entry point.

The market's first week of 2026 has served as a reminder that even high-quality companies can experience sharp drawdowns. Whether Datadog's current levels represent a buying opportunity or the beginning of a larger decline will ultimately depend on the company's ability to execute on its AI-driven growth strategy in the quarters ahead.