Key Takeaways
- Datadog’s entry into the S&P 500, replacing Juniper Networks, marks a significant symbolic and capital shift from legacy networking hardware to high-growth cloud observability software.
- The inclusion, effective 18 June 2024, is expected to trigger a substantial demand shock from passive index-tracking funds, forcing a re-evaluation of the stock among a wider institutional audience.
- While the move validates Datadog’s business model, it also brings its steep valuation into sharp focus, posing risks if macroeconomic pressures curb enterprise cloud spending.
- Juniper’s exit, driven by its acquisition by Hewlett Packard Enterprise, underscores the consolidation imperative in the hardware sector as firms race to integrate AI-native capabilities to remain competitive.
Datadog’s elevation to the S&P 500 is more than a simple index rebalancing act. Its replacement of Juniper Networks, which is being absorbed by Hewlett Packard Enterprise, represents a telling transfer of influence within the technology sector, from the established world of networking hardware to the high-growth domain of cloud-native observability. This change, effective prior to the market opening on 18 June 2024, will compel a significant capital reallocation from passive funds, placing the lofty valuation of a premier software firm under the full glare of the institutional spotlight.1
The Mechanics and Meaning of Inclusion
Inclusion in the benchmark index for US equities provides more than just a certificate of prestige. The most immediate consequence is mechanical buying from the vast pool of capital that tracks the S&P 500. With an estimated $7 trillion in assets directly indexed to the S&P 500, Datadog’s inclusion could generate a demand shock in the region of $6 billion to $7 billion for its shares as fund managers rebalance their portfolios.2
Beyond the forced buying from passive funds, the event broadens Datadog’s institutional relevance. Active managers who are benchmarked against the index can no longer treat the stock as a niche, off-benchmark holding. It is now part of the board, compelling analysts and portfolio managers who may have previously overlooked it to form a view. While the well-documented ‘S&P 500 inclusion effect’ has somewhat diminished in an era of high-speed information flow, the initial share price appreciation often seen on such announcements is a clear reflection of these anticipated flows and heightened attention.
A Tale of Two Business Models
The switch between Datadog and Juniper places the market’s core debate into sharp relief: paying a substantial premium for anticipated future growth versus acquiring established cash flows in the hope of a successful strategic pivot. Datadog, a paragon of the software-as-a-service (SaaS) model, boasts high gross margins and rapid expansion, but trades at valuation multiples that leave little room for error. Conversely, HPE is acquiring Juniper, a mature hardware and services business, for its robust AI-driven networking portfolio in a bid to revitalise its own growth prospects.
A comparison of their fundamental metrics illustrates this stark divergence.
| Metric | Datadog (DDOG) | Hewlett Packard Ent. (HPE) | Juniper Networks (JNPR) |
|---|---|---|---|
| Market Capitalisation (approx.) | $41 billion | $28 billion | $11.5 billion |
| Forward P/E Ratio | ~75x | ~9x | ~15x |
| Price / Sales Ratio (TTM) | ~18x | ~1x | ~2x |
| Revenue Growth (YoY, latest qtr) | 27% | -1% | -1% |
Source: Data compiled from company filings and market data providers as of June 2024.
The numbers depict two entirely different investment propositions. An investor in Datadog is underwriting a narrative of sustained, high-speed growth in the secular cloud market. An investor in HPE is backing a complex integration strategy, betting that the $14 billion acquisition of Juniper will create a more formidable competitor to industry giants like Cisco and Arista Networks.3
Sectoral Tides: From Tin to Code
This index reshuffle is emblematic of a powerful undercurrent in the technology landscape: the migration of value from physical hardware, or ‘tin’, to intangible software and code. The secular trend of digital transformation means that nearly every enterprise is now, in essence, a software company. The platforms that monitor, secure, and analyse the performance of that software—provided by firms like Datadog, Dynatrace, and CrowdStrike—have become critical infrastructure.
Juniper’s departure is part of a wider consolidation trend among hardware providers facing maturing markets and intense competition. HPE’s acquisition is both a defensive and offensive manoeuvre. It aims to bolt on Juniper’s well-regarded Mist AI platform to create a more compelling networking offering that spans from the data centre to the campus and branch edge, a strategy that has received the necessary regulatory approvals.4
Risks and Forward Posture
For Datadog, the primary risk remains macroeconomic. Its fortunes are intrinsically linked to enterprise IT budgets and the pace of cloud adoption. Any material slowdown could rapidly expose its valuation as excessive. The stock’s entry into the S&P 500 occurs at a moment of high sentiment, and its performance from here will depend entirely on its ability to execute against lofty expectations.
The speculative hypothesis is this: Datadog’s S&P 500 inclusion may inadvertently mark a moment of peak enthusiasm. The true test will not be the index rebalance itself, but the company’s first earnings report as a component under renewed economic scrutiny. A minor guidance miss, which might have been overlooked previously, will now be judged by a far broader and less forgiving institutional audience. This shift in shareholder composition could introduce a period of heightened volatility, potentially creating a more attractive entry point for patient capital should the narrative of uninterrupted growth encounter even minor turbulence.
References
- S&P Dow Jones Indices. (2024, June 7). Datadog Set to Join S&P 500. PR Newswire. Retrieved from https://www.prnewswire.com/news-releases/datadog-set-to-join-sp-500-302497299.html
- S&P Dow Jones Indices. (2023). S&P 500 Factsheet. Retrieved from S&P Dow Jones Indices public documentation which states over $7 trillion is indexed to the S&P 500. Specific flow estimates are analyst calculations based on market capitalisation.
- Driebusch, C., & Lombardo, C. (2024, January 9). HPE to Buy Juniper Networks for $14 Billion in AI-Focused Deal. The Wall Street Journal.
- Gebel, M. (2024, June 6). Hewlett Packard Enterprise, Juniper Networks Stocks Jump as DOJ Approves Deal. Investopedia. Retrieved from https://www.investopedia.com/hewlett-packard-enterprise-juniper-networks-stocks-jump-as-doj-approves-deal-11763421
