Why Datadog (DDOG) Shares Are Plunging Today

Petr Huřťák /
2023/10/09 12:13 pm EDT

What Happened:

Shares of cloud monitoring software company Datadog (NASDAQ:DDOG) fell 5.71% in the morning session after Bank of America analyst Koji Ikeda downgraded the stock's rating from Buy to Neutral and lowered the price target from $123 to $105. The analyst cited concerns over conservative demand, heightened competition, and potential AI-related growth delays.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Datadog? Access our full analysis report here, it's free.

What is the market telling us:

Datadog's shares are very volatile and over the last year have had 34 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The biggest move we wrote about over the last year was two months ago, when the stock dropped 20.8% on the news that the company reported second quarter results in which its full-year revenue guidance was lowered and missed analysts' expectations, which is never a good sign. In addition next quarter's revenue guidance also missed Wall Street's expectations. Taking the outlook one step further, some are noting that it implies Datadog will exit the year growing less than 20% on the topline, a major deceleration from recent growth. To add color to the worrisome developments, management noted that Q2 usage growth was slower than Q1 and previous quarters; the slowdown in usage came with its larger spend and cloud native customers. 

On a brighter note, Datadog beat analysts' estimate for revenue and earnings per share during the quarter. In addition, full year non-GAAP operating profit was raised (slower but more profitable growth). Overall, the results were weak, with the markets likely more focused on the missed guidance provided by the company.

Datadog is up 26.4% since the beginning of the year, but at $90.99 per share it is still trading 22% below its 52-week high of $116.72 from July 2023. Investors who bought $1,000 worth of Datadog's shares at the IPO in September 2019 would now be looking at an investment worth $2,430.

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