Bernstein: Datadog and Cloudflare plunge ahead of third-quarter earnings; AI demand could offset slowdown in traditional business

Why did the sector fall, and how long will the headwinds last?

On 30 October 2026, Cloudflare and Datadog fell 9.5% and 11.5%, respectively. Bernstein believes the declines largely reflected earlier disappointing results from AWS and Twilio, as well as weaker-than-expected fourth-quarter commentary from both.
The firm believes the sequential increase in AWS’s second-quarter AI revenue was boosted by heavy token consumption by coding tools, a phenomenon that subsequently ended. Together with AWS capacity constraints, this leaves cloud consumption growth facing a temporary trough in the fourth quarter. Bernstein has lowered its model forecasts for both companies’ traditional customer businesses.
However, the firm’s preliminary fourth-quarter network indicators show that activity rebounded in October, following a pattern similar to the strong fourth quarter of 2025. The indicator is a leading signal for the following quarter’s revenue and thus provides potential support for guidance for early 2027.

Bernstein estimates that Datadog’s AI-native customer base added about 200 million dollars more in annualized recurring revenue in the third quarter than the firm expected at the start of the quarter. The product uses a postpaid model, and strong demand continued from August through the report’s publication, creating a timing difference over whether about 50 million dollars in incremental revenue falls in the third or fourth quarter.
The firm’s existing model assigns the incremental revenue to the third quarter, implying revenue about 90 million dollars above company guidance, roughly twice its historical margin of outperformance. Bernstein believes this allocation may be too aggressive, and the actual contribution may be split between third-quarter revenue and fourth-quarter guidance.
Even though the firm expects year-over-year revenue growth from traditional customers to slow from about 28% in the third quarter to about 25% in the fourth, AI demand could still drive Datadog’s total fourth-quarter revenue up about 40% year over year.

Bernstein estimates that Cloudflare Workers reached about 500 million dollars in annualized recurring revenue in the third quarter, roughly triple its level in the fourth quarter of 2025, and could grow another 25% sequentially in the fourth quarter.
The firm believes application architectures favored by AI coding agents, such as serverless, are spreading rapidly, and Cloudflare and Vercel hold major shares of the market. The scale of relevant deployed applications has grown about threefold since the start of the year, while the trend in early fourth quarter corresponds to another sequential increase of about 25%.
Bernstein expects Cloudflare’s third-quarter year-over-year revenue growth to accelerate by nearly 2 percentage points from the second quarter, with the margin above company guidance potentially the largest of the year. But Workers may still be too small in the fourth quarter to offset cloud consumption headwinds, resulting in slower year-over-year total revenue growth; the firm expects revenue growth to exceed 40% in 2027.

Bernstein maintains its outperform rating and 350 dollar price target on Datadog, and its market-perform rating and 245 dollar price target on Cloudflare. It made no changes to its models, price targets or ratings this time.
The firm believes the companies may have similar growth-rate-plus-margin metrics, but Cloudflare’s valuation is higher relative to Datadog’s. Nevertheless, Bernstein has yet to see a clear catalyst that would disrupt Cloudflare’s high valuation in the near term and believes its growth in 2027 could support that valuation.