Datadog Inc (DDOG) is sinking 4% this morning after Morgan Stanley downgraded the shares to Equal Weight from Overweight. DDOG's platform allow companies to observe and secure their cloud applications.

Why Morgan Stanley Has Soured on DDOG

There is "at least modest risk" that Datadog's fiscal 2025 financial results will come in below analysts' average estimates, warned MS analyst Sanjit Singh in a note to investors today. The analyst noted that only 68% of the company's forward revenue is already under contract, versus the 72% level indicated by the firm's initial guidance. What's more, analysts' average estimate suggests that the net new sales obtained by the company in FY25 will fall about 1%, and that's more ambitious than Datadog's outlook.

A technical analyst using a cloud-based analytics dashboard for financial services.

In light of these points, Singh expects the company to predict that its sales will climb about 20% in FY25, slightly below the 22% gain embodied in analysts' mean outlook.

Finally, the analyst warned that some companies which emphasize AI could look to cut the amount that they spend on Datadog's platform.

Despite Singh's downgrade, maintained a $143 price target on DDOG stock.

Additionally, he wrote that Datadog Inc (DDOG) is "executing as well as can be expected," in light of companies' budgetary issues.

While we acknowledge the potential of DDOG, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DDOG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.