Datadog Shares Slide 10% After In-Line Forecast Disappoints

By Amara Osei

Datadog shares dropped more than 10% in Wednesday morning trading after the observability software maker issued a fourth-quarter revenue forecast that merely matched Wall Street's expectations. The stock had already fallen 21% in the five days leading up to the report.

The damage came from guidance, not results. TD Cowen analyst Andrew Sherman noted that Datadog's outlook for $1.19 billion to $1.2 billion in fourth-quarter revenue was "just in line" with what analysts were expecting. At the high end, that range implies sequential growth of only $3 million from the $1.197 billion the company recorded in the third quarter.

The third-quarter number itself was strong. That $1.197 billion in revenue represented 35% growth from a year earlier, which Sherman called "well above" the high end of the company's own forecast. But a beat on the quarter couldn't offset a guide that offered investors no upside surprise.

What's happening with big customers?

The customer metrics added to the caution. Datadog disclosed 4,860 customers with annual recurring revenue of $100,000 or more — 140 more than it had in the second quarter. Sherman flagged the deceleration: the company had added 170 of those customers from the first quarter to the second.

On the earnings call, Sherman said he'll be looking for commentary on two things: the growth of Datadog's core business, and whether large customers are scaling back their usage.

Why AWS matters so much to this story

Analysts view Datadog as particularly levered to the growth of Amazon's AWS cloud-computing business. The two companies announced a collaboration late last year with a partnership "to help organizations running on AWS monitor, optimize and secure their cloud environments," according to the press release announcing the deal.

That relationship sits inside a broader, stranger dynamic between Datadog and the major cloud providers. In a note to clients earlier this month, FBN Securities analyst Shebly Seyrafi laid out the mixed loyalties at play.

The biggest three cloud providers "are unlike any competitor" to Datadog because they simultaneously "compete with Datadog, sell it, buy it and host it," Seyrafi wrote. Each runs its own built-in observability offering, he noted, yet all of them also resell Datadog's software through their marketplaces.

What comes next

The sell-off puts the burden on the earnings call. Investors will want management to explain why the fourth-quarter guide implies near-flat sequential revenue, and whether the slowdown in $100,000-plus customer additions signals larger clients pulling back on usage.

The answer matters beyond one quarter. Datadog's growth story depends heavily on AWS momentum and on cloud giants continuing to resell a product they also compete against. How management addresses that tension, and the usage trends at its largest accounts, will likely determine whether Wednesday's 10% decline marks a buying opportunity or the start of a tougher growth chapter.