Morgan Stanley: Datadog’s core growth accelerated in the third quarter, while large-customer factors weighed on fourth-quarter guidance

Where was third-quarter performance strongest?

Revenue in the third quarter of 2026 was $1.2 billion, up 35% year over year and about 5% above market consensus; operating profit was $334 million, with an operating margin of 28%, about 4.5 percentage points above consensus. Earnings per share were $0.81, also about 25% above consensus.
Growth was not driven solely by the largest customer: revenue growth accelerated again excluding that customer; growth in revenue from non-AI customers accelerated for the fifth consecutive quarter to nearly 30%, up about 1 percentage point from the previous quarter, compared with about 20% a year earlier.

The company guided to fourth-quarter revenue of $1.19 billion to $1.2 billion, representing year-over-year growth of 25% to 26%, broadly flat compared with the third quarter; over the past two years, fourth-quarter revenue grew by about 3% quarter over quarter on average. Management said the guidance implies that revenue growth excluding the largest customer remains in the low-to-mid 30% range.
Usage by the largest customer declined in the third quarter, but its spending remained far above the contractual minimum commitment; the fourth-quarter guidance assumes only the minimum commitment, creating a headwind to quarter-over-quarter growth. If usage remains at the third-quarter level, revenue could exceed the guidance assumption.
Several large AI customers renewed early, increasing their annualized committed amounts but receiving lower volume-based unit prices. Billing current usage at the new prices would weigh on revenue in the short term; customer usage optimization and early renewals will also increase quarterly growth volatility.

AI customers number more than 850, compared with more than 750 in the previous quarter, including 39 with annual spending above $1 million. The AI division of a leading technology company increased its committed amount to about three times the previous level after two quarters as a customer.
Infrastructure monitoring has more than $2 billion in annual recurring revenue and is growing in the mid-30% range; management said its acceleration has not yet benefited meaningfully from monetizing GPU monitoring. Year to date, the number of monitored GPU devices has grown to about 8 times its previous level.
Platform cross-selling is also deepening: the share of customers using at least four products rose from 54% a year ago to 61%; the share using at least eight products increased from 16% to 26%.

The firm believes the fourth-quarter slowdown mainly reflects changes in customer commitments and pricing, rather than weakening underlying demand, but the near-term growth trajectory is consequently lower. It cut its price target from $300 to $270 while maintaining an Overweight rating.
The model lowers its revenue growth forecast for 2027 from 25.1% to 23%. The firm also outlined a path to growth of about 30%: the largest customer renews in the third quarter of 2027, the non-AI business maintains growth close to 30%, and the AI-native customer base excluding the largest customer grows by 50% to 100%.
The $270 price target is based on the firm’s 2028 free cash flow forecast of $1.78 billion, valued at 63 times free cash flow and discounted by one year; previously, it used $1.88 billion and a 67-times valuation.