Bernstein: Datadog beats third-quarter guidance, but lower AI revenue expectations weigh on price target

Why did the guidance disappoint analysts despite the third-quarter beat?

Datadog reported third-quarter revenue of 1.197 billion dollars, up 35% year over year. That was 57 million dollars above the midpoint of the company’s prior guidance and about 4% above consensus, but below Bernstein’s own prior estimate of 1.231 billion dollars.
The company’s full-year revenue guidance increase roughly reflected only the third-quarter revenue beat, whereas it had typically raised guidance by 2–3 times the quarterly beat. Bernstein calculates that even if fourth-quarter revenue beats guidance by 50 million–60 million dollars, year-over-year growth for the quarter would be only about 30%–31%, below the third quarter’s 35%.
Profitability was stronger: third-quarter non-GAAP operating income was 334 million dollars, up 61% year over year and 24% above consensus. Free cash flow was 251 million dollars, up 17% year over year, but 20% below Bernstein’s estimate.

In its fourth-quarter guidance, the company included revenue only for the largest customer’s contractual minimum usage, to reduce the impact of fluctuations in that customer’s usage on the guidance. Its third-quarter guidance had included some excess usage that had already occurred. Management said the approach for the fourth quarter did not imply a further slowdown in that customer’s usage.
Bernstein believes the largest customer is OpenAI and estimates that its usage of Datadog began declining in the third quarter and will remain at a low level in the fourth quarter. Meanwhile, usage expansion among other large AI-native customers remains strong.
Some fast-growing customers renewed early in exchange for discounts tied to higher usage, generally increasing their committed amounts and extending contract terms. The price reductions immediately lower revenue from existing usage. Bernstein estimates that this will be a headwind of about 15 million dollars to fourth-quarter revenue; management said that historically, usage has taken about one quarter on average to grow back to the pre-discount revenue level.

Management said core business growth accelerated by about 1 percentage point in the third quarter compared with the second quarter. Based on company disclosures, Bernstein judged that non-AI revenue grew close to 30% year over year. However, the firm expects growth among traditional customers to fall to about 25% in the fourth quarter.
Based on alternative data and fundamentals, Bernstein expects overall growth to slow by about 3 percentage points in the fourth quarter. Factors include budget pressure in the second half following substantial AI usage in the first half, disruption from security patching activity from summer into early fall, and ongoing compute-supply constraints at large cloud service providers.
AWS web indicators tracked by the firm were weaker than expected in the third quarter and significantly below their level in the same period of 2025. Preliminary indicators for early in the fourth quarter have strengthened; together with an easier sequential comparison, this could provide a more optimistic signal for the first quarter of 2027.

The firm’s prior model for third-quarter revenue from AI-native customers was about 34 million dollars higher than the actual result: about 20 million dollars of the gap reflected a lag in demand converting into revenue, and about 14 million dollars came from overestimating the relationship between token consumption and Datadog revenue. The updated model assumes a one-quarter lag and discounts incremental revenue in each quarter by twenty-five percent.
Bernstein lowered its forecast for annual recurring revenue from its AI business for 2027–2028 by about 25%, while reducing its valuation multiple from about 22 times to about 18 times. With valuation multiples and discounted cash flow weighted equally, the firm cut its price target from 350 dollars to 273 dollars and maintained its Outperform rating.