Key Highlights

  • Datadog shares were trading down 13.94% at $189.77, against a prior close of $220.52.
  • Third-quarter Revenue of $1.197 billion rose 35%, and adjusted EPS of $0.81 beat estimates near $0.64.
  • Fourth-quarter revenue guidance of $1.19 billion to $1.20 billion implies roughly flat sequential revenue.
  • Full-year revenue guidance was raised to $4.515 billion to $4.525 billion.
  • Volume ran about 2.7 times the average.

Investors Look Past the Beat to a Flat Fourth Quarter

Datadog (NASDAQ:DDOG) shares were trading down 13.94% at $189.77 on Wednesday, on Volume about 2.7 times average, even as the broader market rallied after the midterms. Third-quarter revenue of $1.197 billion rose 35% and landed above the high end of guidance, and adjusted EPS of $0.81 beat estimates near $0.64. Management also raised full-year guidance.

The problem is the fourth-quarter outlook. Revenue guidance of $1.19 billion to $1.20 billion implies roughly flat sequential revenue and growth of about 25% to 26%, a sharp slowdown from the third quarter.

The Largest AI Customer and Early Renewals Cloud the Guide

Management said the outlook assumes its largest AI customer stays at its minimum commitment, and that some AI customers renewed early at better pricing, which weighs on near-term revenue. Excluding that customer, fourth-quarter growth is guided in the low to mid 30s percent. Analysts at TD Cowen and Truist flagged the guide and large-customer usage as concerns.

BTIG cut its target to $260, Capital One to $247 and Wells Fargo to $300, while Needham kept a Buy rating and a $300 target. The stock had already fallen about 21% in the five days before the report, and peers MongoDB (NASDAQ:MDB) and Snowflake (NYSE:SNOW) fell only modestly. Dynatrace (NYSE:DT) had dropped sharply the day before, so the selling looks concentrated in Datadog.

Broad Customer Growth and Rising Profits Underpin the Quarter

Datadog is a New York-based software-as-a-service company founded in 2010 by Chief Executive Olivier Pomel and Chief Technical Officer Alexis Le-Quoc. Its platform gives developers and operations teams real-time visibility across infrastructure, applications, logs, security and, more recently, large language model usage. It sells mainly through consumption-based and multi-year subscriptions and has about 8,100 employees.

Billings rose 30% to $1.16 billion, remaining performance obligations grew 38% to $3.85 billion, and net revenue retention was in the low 120s percent. Growth from customers outside the AI group accelerated for the fifth straight quarter to the high 20s percent. Datadog now serves about 33,500 customers, including 4,860 with annual Recurring Revenue above $100,000.

Product adoption keeps broadening, with 61% of customers using four or more products and 16% using ten or more. Infrastructure monitoring has passed $2 billion in annual recurring revenue and is growing in the mid-30s percent range. AI-related wins include deals with a US defense agency and two Japanese banks, and GPU devices monitored are up eightfold this year.

Non-GAAP Operating Income was $334 million, a 28% Margin against 23% a year ago, with gross margin at 81.2%. Free Cash Flow was $251 million, and cash and securities totaled $5.2 billion. The company now counts more than 850 AI customers, up from about 750 last quarter, and Bits AI has become its fastest adopted product.

Valuation Leaves No Room for Slippage After the Reset

Full-year revenue guidance of $4.515 billion to $4.525 billion implies about 32% growth, with non-GAAP operating income of $1.095 billion to $1.105 billion and EPS of $2.73 to $2.75. The shares trade at 68.30 times forward Earnings and 261.96 times trailing earnings, against a 52-week range of $98.01 to $300.68.

Datadog trades at a premium multiple, so any growth slowdown tends to trigger outsized moves.

The net takeaway is that the quarter was strong and the guide was cautious, which shifts the debate to how durable AI-related revenue is. The next things to watch are whether early renewals show up as higher revenue in later quarters, any change in the largest customer’s commitment and whether non-AI growth keeps accelerating.