Brokerage Bernstein downgraded cloud monitoring software provider Datadog to "Market-Perform" from "Outperform" on Monday, saying the stock's rally has outpaced the pace of fundamental improvement even as the firm becomes more constructive on AI-driven demand.
At the same time, Bernstein increased its price target on Datadog to $226 from $180, reflecting higher long-term revenue forecasts and stronger expectations for demand tied to artificial intelligence. The revised target remains below Datadog's July 2 closing price of $260.36, which Bernstein said implies roughly 13% downside and was a key factor behind the rating change.
Bernstein described Datadog as executing well in its observability software franchise and noted expanding opportunities in AI infrastructure and cybersecurity. The brokerage labeled the company an "AI winner" and said the risk of disruption from emerging technologies has diminished. After surveying demand, Bernstein also raised its estimates for revenue coming from AI-native customers following increased optimism about orders from AI laboratories.
Despite those longer-term upgrades, the firm cautioned that investor expectations have grown overly optimistic. Bernstein pointed to signs that enterprise demand beyond AI is slowing and reported that growth at some AI labs appears to be leveling off. The brokerage expects Datadog's revenue growth to decelerate sharply in the fourth quarter amid tougher year-ago comparisons and moderating AI demand.
Specifically, Bernstein projects Datadog's year-over-year revenue growth could drop to about 29% in the fourth quarter, a pace the firm contrasted with investor expectations that growth would remain above 30% into the following year. It also expects growth in Datadog's non-AI business - which the firm notes makes up roughly 85% of revenue - to peak in the third quarter and then slow.
Bernstein's channel checks and web traffic indicators, the firm said, point to softer cloud workload growth. The brokerage cited hyperscaler capacity constraints and customers' prioritization of cybersecurity work as factors weighing on near-term cloud demand. Even so, Bernstein reiterated that longer-term adoption of AI should remain a key growth driver for Datadog.
Balancing its near-term caution with a more favorable long-term view, Bernstein raised its long-term revenue growth assumptions by several percentage points and suggested Datadog could resume stronger expansion once the expected slowdown runs its course. However, the firm concluded that the current market valuation already embeds much of that anticipated improvement, supporting its decision to lower the stock's rating.
Summary
- Bernstein cut Datadog to Market-Perform from Outperform while boosting its price target to $226 from $180.
- The new target sits below Datadog's July 2 close of $260.36, implying roughly 13% downside.
- Bernstein raised long-term revenue assumptions and sees Datadog as well positioned for AI and cybersecurity, but warns of near-term slowing in enterprise demand and cloud workloads.
Key points
- Valuation concern - The stock's recent rally is judged to have outpaced fundamentals, prompting a downgrade despite improved long-term forecasts.
- AI opportunity - Bernstein upgraded expectations for AI-related revenue, including sales to AI laboratories, and called Datadog an "AI winner."
- Sectors affected - Cloud software, cybersecurity, and AI infrastructure markets are central to the analysis and may be impacted by shifts in enterprise cloud workload growth.
Risks and uncertainties
- Near-term demand risk - Bernstein sees signs of slowing enterprise demand outside of AI, which could affect revenues tied to standard cloud workloads.
- AI growth plateau risk - The firm reported indications that growth at some AI labs is beginning to plateau, which could dampen AI-related revenue gains.
- Capacity and prioritization constraints - Hyperscaler capacity limits and customers prioritizing cybersecurity upgrades may slow cloud workload growth and delay spend on monitoring services.