AI Trade Over? Datadog Results Say It's Gaining Momentum

Key Points

• Datadog is well-positioned to benefit from AI spending as more companies lean into cloud-based services.
• The Q4 guidance update triggered a market shift that points to DDOG at $300.
• Analysts and institutions are buying in Q4, but there is a risk that gains will be capped due to the high valuation.

For those concerned that the AI bubble is bursting and the AI trade is over, turn your attention to Datadog NASDAQ: DDOG. Its Q3 results and outlook reveal that the AI trade is broadening, with spending focused on a broader range of companies and momentum building. 

Regarding Datadog, it not only utilizes AI to enhance internal operations and provide cybersecurity services to clients, but also leverages these services to support the development and security of cloud-based applications that incorporate AI.

Datadog’s robust Q3 performance and guidance update are likely to be followed by outperformance and improving guidance in subsequent releases, which will strengthen bullish sentiment trends and drive the stock price up to set a fresh all-time high. 

Datadog Wows Market With Beat-and-Raise Quarter

Datadog had a solid quarter, with revenue growth accelerating year over year to sustain the prior quarter’s 28% pace and outpacing the consensus estimate by 400 basis points. The gains were primarily centered on client growth and service penetration, with large clients accounting for the majority. 

Clients contributing more than $100,000 in ARR increased by 16% and are expected to continue growing robustly as enterprises rely more heavily on cloud-based applications. 

Margin and cash flow are other areas of strength. The top-line performance helped offset an expected spending surge, leaving adjusted earnings up approximately 20% and nine cents, or 20% better than MarketBeat’s reported consensus figure. Margin strength is also expected to continue, as reflected in the guidance. 

Datadog’s guidance is wow-quality. The company issued Q4 guidance well above the consensus forecast and, when combined with YTD results, left the full-year figures in a similarly strong position. As it stands, the company expects Q4 revenue of $914 at the midpoint of the range, more than 300 basis points better than expected, with revenue growth at 24% and earnings also strong.

The FY range, likely cautious given the momentum, has an adjusted EPS of $2.00 at the low end, which is 900 bps better than analysts were hoping for. 

Analysts' Sentiment Trends Lead Datadog in Q4

Although no analysts issued revisions or price target changes immediately after the release, several analysts noted the company’s strength and outlook. The chatter aligns with the existing trend, which includes increased coverage, a Moderate Buy rating, and a rising price target.

The consensus lags behind the market in Q4 but is up compared to the prior year, quarter, and month, suggesting a move to the high end of the range is likely. The high end puts this market at $200, which coincides with the all-time high and is on track to set a new one.

Institutions, however, pose a risk. The group is bullish on Datadog, owning nearly 80% of the stock, but sold a significant portion of it in Q3.

The group bought on balance in the first few weeks of Q4 but may revert to profit-taking as share prices rise. The critical resistance point is expected to be near $200 and may be tested before the end of November.

Datadog’s Market Was Unleashed by Its Guidance Update

Datadog’s stock price surged as much as 25% in premarket trading following its release, indicating robust support at its prerelease close. The move suggests a significant shift in dynamics and potential for higher price points. The critical resistance point is at $200, the all-time high; a move above this level could lead to an upside of $100 to $120, putting this market in the $300 to $320 range sometime in 2026.

Among the drivers are Datadog's cash flow and shareholder value. The company posted a cash flow-positive quarter despite increased ad spending; free cash flow margin was 24%, and liabilities were reduced. The net result is a 26% increase in shareholder equity, with expectations for another robust gain in fiscal 2026.