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Datadog (DDOG) just saw its stock pop 23% on the back of a strong Q3 and an even rosier Q4 forecast. Revenue for the third quarter hit $885.7 million, a 28% year-over-year jump, and they're projecting $912 to $916 million for Q4. Wall Street was expecting less (around $852.8 million for Q3, according to LSEG analysts). Earnings per share also beat expectations—55 cents adjusted versus the 45 cents that FactSet analysts predicted. Not bad.
But let's not get carried away. The market often overreacts to these things. While a 23% jump is impressive (their second-best day ever, actually, just behind a 28% spike in November 2023), it's crucial to look under the hood. Datadog (DDOG) Shares Skyrocket, What You Need To Know - Yahoo Finance
Digging Into the Numbers
Net income, for instance, tells a slightly different story. While Datadog did report a net income of $33.9 million (10 cents per share) for the quarter, that's down from $51.7 million (14 cents per share) last year. Now, before the bulls scream "growth investments!", let's consider where that "growth" is supposedly coming from: AI.
Datadog has been aggressively pushing AI technologies and security tools, citing increased demand for cloud security driven by (you guessed it) artificial intelligence. They rolled out Bits AI Agents for SRE, their MCP Server, and the foundation model TOTO back in June. They've also been adding features to their LLM Observability suite. All good, right?
Well, here's the part of the equation I find genuinely puzzling. They touted expanded support for Oracle Cloud Infrastructure (OCI) a few weeks before this earnings announcement, highlighting improvements for AI and machine learning workload management. The stock gained 2.9% on that news. But is that enough to justify the AI narrative? How much of this revenue beat is actually attributable to these AI initiatives? Datadog doesn’t break down revenue streams that granularly.
And that's the problem. We're being asked to buy into the AI story without enough data to back it up. The number of large customers (spending over $100,000 annually) increased by 210, bringing the total to 4,060. That’s a 16% increase YoY. Is that AI-driven? Possibly. Is it definitively AI-driven? Not necessarily. It could just be good old-fashioned salesmanship.
It's like a chef adding a sprinkle of truffle oil to every dish and then claiming the entire menu is now "gourmet." Sure, truffle oil is nice, but is it fundamentally changing the dining experience? And more importantly, are customers willing to pay a premium for that sprinkle?
The Volatility Factor
Datadog shares are notoriously volatile. They've had 19 moves greater than 5% over the last year. This isn't a steady, predictable climb; it's a rollercoaster. If you bought $1,000 worth of Datadog’s shares 5 years ago, you'd be looking at an investment worth $1,866 now. That's a decent return, but it came with a lot of stomach-churning dips and surges. It’s a CAGR of ~13.2% (to be precise, 13.24%), which is good, but not eye-popping considering the risk.
Here's a thought leap: How accurately are these "analyst expectations" even measuring real demand? Are analysts properly weighting the AI hype cycle? Or are they just extrapolating from previous quarters, assuming the AI narrative is as solid as Datadog wants us to believe? The fact that Datadog consistently beats these expectations makes me wonder if the expectations are deliberately set low.
The Hype Train's Next Stop
So, where does this leave us? Datadog is riding the AI wave, and the market is rewarding them for it. But I suspect the market will eventually demand more concrete proof that these AI investments are paying off. The question isn't whether Datadog is growing (it is). The question is whether that growth justifies the current valuation—and whether the AI bet is truly the golden goose they're portraying it to be.