Datadog Falls After Bernstein Downgrade, Price Target Raised

Datadog (DDOG) shares fell 2.3% to $134.50 on Monday after Bernstein downgraded the cloud monitoring company. The firm raised its price target to $145 from $130, a 12% increase. It also cut its rating to market-perform from outperform. The combination is unusual and suggests the analyst sees limited upside in the near term despite long-term confidence.

Bernstein analyst Peter Weed said the downgrade was driven by "caution" around Datadog's fourth-quarter report, expected Feb. 13. The note acknowledged strong execution in 2024, with revenue growth accelerating through the year. Weed flagged that the pace of new business may slow as customers digest recent spending. AI workloads, a tailwind for Datadog's observability platform, may not accelerate at the same rate in Q4, the analyst wrote. The company's consumption-based model means any slowdown in usage growth directly hits revenue.

The stock had gained 38% over the past six months, benefiting from the AI infrastructure buildout. Companies running GPU clusters and large language models use Datadog's tools to monitor performance and cost. That demand has been a key driver of the company's growth. AI workloads have been a significant growth driver, with companies using Datadog to monitor training and inference. The pace of AI adoption may moderate as companies move from experimentation to production. Bernstein's call suggests that benefit may have peaked in the near term, at least until the next wave of AI deployment.

Weed also pointed to an uneven enterprise software spending environment. Large deals have held up, with enterprises still committing to multi-year cloud contracts. Mid-market customers are showing more caution on new commitments, the note said. Weed said the pattern could weigh on Datadog's consumption-based revenue model, which depends on customers expanding usage rather than signing fixed contracts. Under the consumption model, customers pay based on usage. Any slowdown in cloud workload growth directly impacts Datadog's revenue.

The raised price target reflects confidence in Datadog's long-term position. The platform is deeply embedded in modern cloud architectures. Its competitive moat against rivals like New Relic and Dynatrace is intact. The near-term risk of a guidance miss or a cautious outlook warrants a sidelines stance, Bernstein said. The firm sees the stock as fairly valued at current levels given the uncertainty. New Relic trades at about 8 times forward sales, Dynatrace at 10 times. Datadog's premium reflects its higher growth rate and broader platform.

Datadog reports fourth-quarter results on Feb. 13. The company has beaten consensus revenue estimates in each of the last four quarters. Analysts expect revenue of $737 million, up 23% from a year earlier, according to Bloomberg data. The growth rate has been slowing from the 30%+ levels seen in 2023. The question is whether it can hold above 20% into 2025. The downgrade comes as the software sector faces a mixed earnings season, with some companies reporting strong demand and others citing caution.

Datadog carries an Alpha Score of 68 out of 100, a moderate rating that reflects balanced fundamentals and valuation. The stock trades at about 12 times forward sales, a premium to the software sector median. The multiple sits below its own five-year average of 15 times. The multiple has compressed from its five-year average of 15 times, reflecting expectations of slower growth. At the current price, the stock offers limited upside unless growth re-accelerates.

The Feb. 13 print will show whether the demand pause is real or just a seasonal lull.