Datadog Stock Crashes 14% Despite an Earnings Beat. Is It a Buy?
Datadog beat estimates, raised its full-year outlook for the third straight quarter, and still watched its stock crater 14%. The reason buried in the guidance tells a more complicated story than the sell-off suggests.
Datadog (NASDAQ:DDOG | DDOG Price Prediction) beat Wall Street’s estimates this morning and raised its full-year outlook for the third straight quarter. The stock fell anyway. Shares traded at $190.47, down 13.63% from the prior close of $220.52, and are off 32.17% over the past week. The cause was a fourth-quarter outlook that implies growth slowing to 25% to 26%.
A Strong Quarter on Every Line
Revenue came in at $1.197 billion, up 35.2% year over year and above the $1.1455 billion consensus. Non-GAAP EPS of $0.81 beat the $0.6407 estimate, marking the company’s sixth straight beat. Operating margin expanded to 28% from 23%. RPO rose 38% to $3.85 billion.
CEO Olivier Pomel summed it up:
“Datadog delivered a strong third quarter, with 35% year-over-year revenue growth, $290 million in operating cash flow, and $251 million in free cash flow.”
Why the Guidance Spooked Investors
Datadog guided Q4 revenue to $1.19 billion to $1.20 billion, about flat with Q3. That guidance counts only the minimum commitment from the largest customer, which spent well above that minimum in Q3. Several large AI customers also renewed early at lower volume pricing. On the call, management explained:
“The only thing that has changed was in Q3, we did some renewal extensions with some large customers and large AI customers, where, as normal, we essentially extend and increase the commit, but do better pricing for that. These do create a headwind in the short term to revenue.”
Setting the largest customer aside, implied Q4 growth lands in the low to mid 30s percent range. Growth from non-AI customers sped up for the fifth straight quarter, reaching the high 20% range.
The bears have real points. Billings grew 30%, slower than revenue. Free cash flow margin fell to 21% from 24%, and stock-based compensation hit $237.2 million.
How Datadog Compares With Its Observability Rivals
Dynatrace (NYSE:DT) grew revenue 17.43% last quarter. It also cut its EPS guidance to $1.88 to $1.90 because of dilution from the Arize deal. Elastic (NYSE:ESTC) grew revenue 15.13% with a net expansion rate of approximately 111%. Datadog’s net retention sits in the low 120s percent. Dynatrace CEO Rick McConnell called the need for observability urgent:
“As organizations increasingly deploy AI agents into production, the need for enterprise-grade observability and governance has never been greater.”
Investors pay for Datadog’s growth. Its market cap is about $63.36 billion, compared with $13.22 billion for Dynatrace and $9.31 billion for Elastic. Even after the drop, the stock trades near 70x the center of its fiscal 2026 non-GAAP EPS guidance of $2.73 to $2.75.
Verdict: Cautious Guidance Behind an Overdone Drop
This has happened before. After Q2, shares fell 19.03% on earnings day, gained 10.01% over the next week, and ended down 8.31% after thirty days. Options traders are leaning bullish, with a full-chain put/call ratio of 0.62.
For long-term investors, the drop looks bigger than the fundamentals support. The Q4 guide treats the largest customer’s minimum as its ceiling, while the core business is speeding up. The 70x multiple means execution still has to be near perfect. In Q4, watch three things: how much the largest customer spends, whether billings catch up with revenue, and whether free cash flow margin recovers.
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Chris Lange is a financial and geopolitical writer with more than a decade of experience covering a myriad of topics. He has published thousands of articles for 24/7 Wall St., with past coverage focused heavily on stocks, IPOs, healthcare, defense, global affairs, and technology.
His work has been quoted, or referenced by a number of outlets including Business Insider, USA Today, Yahoo Finance, MSN, The Motley Fool, and many other publications. A graduate of Southwestern University, he studied business with a focus on investments and has previous experience in banking and startups.
When not reading or writing the news, he is following his passion for Lacrosse, playing chess, or building solar projects with his dad.
