Datadog (DDOG.US) operating profit surged 61%, but pre-market stock prices plummeted 20%! AI growth narrative meets harsh market expectations

The Zhitong Finance App learned that after the cloud monitoring and analysis software company Datadog (DDOG.US) announced pre-market results on Wednesday, the stock price plummeted by about 20% in pre-market trading. Datadog handed over the third-quarter earnings report, which had both revenue and profit expectations, but the stock price plummeted before the market. The decline hovered around 19% as of press release. Judging from the newly announced performance guidance structure, the focus of market disappointment was — strong growth in the third quarter, but almost all of the increase in revenue forecasts for the whole year came from an already realized excess revenue structure. The fourth quarter did not release a clear signal of significant growth benefiting from the AI intelligence frenzy.

According to financial data, Datadog's third-quarter revenue was US$1,197 million, up 35.2% year on year, exceeding FactSet's agreed analysts' expectations of about US$1,146 billion by about 4.5%; adjusted earnings per share were US$0.81, up 47.3% year on year, higher than market expectations of about US$0.64 by about 26.6%. However, TD Cowen, a well-known financial giant on Wall Street, had anticipated a sharp increase in revenue of about 35% before the financial report revealed, indicating that although the actual performance exceeded analysts' unanimous expectations, it did not clearly exceed the more optimistic judgments of some institutions that were significantly bullish.

What really affects the forward-looking pricing of the market is the fourth quarter earnings outlook — the overall revenue performance guide range was 1.19 billion US dollars to 1.2 billion US dollars, with a median increase of about 25.4% year-on-year and basically flat from month to month, slightly lower than the market forecast of about 1.2 billion US dollars; the adjusted EPS guidance of 0.69 to 0.71 US dollars is still higher than the forecast of about 0.64 US dollars. The full-year revenue guidance rose to the $4.515 billion to $4.525 billion range, and the adjusted EPS for the full year rose to $2.73 to $2.75. According to the old and new guidelines, the median revenue for the whole year increased by 60 million US dollars, but the third quarter revenue already exceeded the median value of about $57.09 million, leaving only about 3 million dollars of additional upgrades for the fourth quarter — which can be described as highlighting market concerns that future growth may slow drastically, that is, the surprise that has already been fulfilled is very limited, but the increase in future growth expectations is very limited.

Major customers and multi-product sales support profits, but cash conversion still needs to be accelerated to keep up

Datadog's performance report shows that the company's adjusted operating profit for the third quarter reached US$334 million, up 61.2% year on year, and operating margin rose from 23% to 28%; GAAP operating profit was US$74.71 million, a loss of US$5.81 million in the same period last year, and operating leverage improved markedly.

However, there is still a big gap between the two profit scales. The company's equity incentives for the third quarter were about US$237 million. Operating cash flow was US$290 million, and free cash flow was US$251 million, up 17.1% year over year, but the free cash flow ratio fell from 24% to 21%. This means that profit expansion is ahead of the pace of cash growth, and the quality of the company's profit cannot be judged based on adjusted profit margins alone.

The basis for growth is mainly reflected in major customer expansion and product penetration. The number of customers with annual recurring revenue of at least $100,000 reached 4,860, an increase of about 20% over the previous year; the proportion of customers using at least four products rose from 54% to 61%, and at least six from 31% to 41%. The net dollar retention rate remained around 120%, reflecting the continued increase in expenses of existing customers; however, the total number of customers was 33,500, an increase of only about 100 over the previous month. The pre-market drop in stock prices after the announcement of the company's results also highlights to a certain extent that market participants are simultaneously observing whether stock expansion can continue, whether new customer acquisition can be accelerated, and whether revenue growth can be converted into higher cash returns.

Wall Street's bullish logic still focuses on these business indicators. Prior to the financial report, StoneX maintained a “buy” and a target price of $330, and listed Datadog as the first choice for infrastructure software, focusing on commercialization of AI products and expansion of the security business. However, this bullish judgment is expected before the financial report, and cannot yet be taken as the agency's latest response to this sharp pre-market drop.

The more complex the intelligence, the more prominent the value of cloud monitoring, but the big trend of benefiting from AI still requires revenue verification

Datadog sells cloud-based observability and security software that centrally analyzes infrastructure metrics, logs, application tracking, and security signals. AI agents break down a request into multiple rounds of model reasoning, data retrieval, and tool invocation. Businesses must identify where errors occur and control delays, costs, and security risks.

As a result, AI applications entering production environments will expand monitoring requirements. Agent Observability is billed according to the intake model call records to provide a direct monetization portal for the growth in agent usage; it is worth noting that the company's revenue growth still depends on customer access and paid usage, and cannot simply be equated with GPU or inference token growth.

Another path comes from Datadog's own AI products. The company revealed on October 29 that Bits AI has more than 10,000 paying customers; the Scout 1.0 special model is used to investigate production faults. The company hopes to increase customer value by reducing inference costs and speeding up troubleshooting. The meaning of the investment is that Datadog can not only take on the monitoring requirements brought about by customer AI workloads, but also increase product revenue through automated operation and maintenance. However, the current financial report did not separately disclose AI revenue contributions, and the overall 35% increase cannot be fully attributed to AI.

Based on the closing calculation from October 28 to November 3, Datadog fell by about 20.8%. The Nasdaq 100 and Philadelphia Semiconductor Index fell by about 5.5% and 9.3% respectively during the same period, and the company clearly outperformed both. The market recognises the long-term space for AI monitoring requirements, but is still downgrading valuations that are willing to pay for future growth.