What Happened?

Shares of cloud monitoring software company Datadog (NASDAQ:DDOG) fell 14.9% in the pre-market session after the company reported disappointing fourth quarter results and provided full-year revenue and EPS guidance below Wall Street's estimates. Despite strong revenue growth of 25% year on year, operating margins shrunk, and the outlook suggests a slowdown in growth. Notably, the guidance implied a 10% y/y decline in net new revenue, and when combined with the weaker margins, could suggest the company is facing stronger competition to find new customers. Overall, this quarter could have been better, and the guidance is weighing on shares.

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What The Market Is Telling Us

Datadog’s shares are somewhat volatile and have had 11 moves greater than 5% over the last year. But moves this big are rare even for Datadog and indicate this news significantly impacted the market’s perception of the business. 

The previous big move we wrote about was 15 days ago when the stock dropped 6.1% on the news that Stifel analysts downgraded the stock's rating from Buy to Hold and lowered the price target from $165 to $140. A key issue seems to be Datadog's AI potential, as Stifel sees limited upside from Datadog's existing business with OpenAI, the creator of ChatGPT. OpenAI depends on critical infrastructure and software, including semiconductor chips, cloud platforms, and even the developer operations and security tools that Datadog provides. If Datadog's role in this ecosystem isn't as strong as hoped, it could dampen the AI-driven growth narrative, which has been a major attraction for investors.

Datadog is down 6.1% since the beginning of the year, and at $134.80 per share, it is trading 20.1% below its 52-week high of $168.65 from December 2024. Investors who bought $1,000 worth of Datadog’s shares 5 years ago would now be looking at an investment worth $2,779.

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