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Investing.com -- Datadog Inc . (NASDAQ:DDOG) shares tumbled 5.6% in today’s trading session, following a downgrade from analysts at Stifel. The firm shifted its stance on Datadog from "Buy" to "Hold," setting a new price target of $140, down from $165. The downgrade comes ahead of the company’s fourth-quarter earnings report, which is scheduled to be released in two weeks.
Stifel analyst Brad Reback cited concerns about the company’s revenue growth and margins as reasons for the downgrade. In his analysis, Reback anticipates that Datadog will face revenue growth and margin challenges throughout the fiscal year 2025. This outlook, combined with Datadog’s valuation, which he deems fairly full at approximately 13.5 times CY26 estimated EV/Revenue and about 47 times EV/Free Cash Flow, presents a less favorable risk-reward balance for the stock in the upcoming quarters.
Reback also mentioned that, while OpenAI is expected to renew its contract with Datadog for another year, there is a belief that OpenAI has been able to significantly optimize its usage of Datadog’s services. This optimization could potentially create a considerable growth headwind for Datadog in FY25, which may be particularly noticeable in the first quarter on a quarter-over-quarter basis.
On the topic of margins, Reback suggested that Datadog may need to increase its sales and marketing investments more aggressively following a slower post-Covid ramp-up in 2023. This would be necessary to try and sustain what he estimates to be around a 20% core growth rate, excluding general AI contributions.
The analyst elaborated on his outlook for Datadog, stating, "we envision revenue growth and margin headwinds over the course of FY25." This comment reflects a cautious stance on the company’s financial performance in the medium term.
Investors are now eyeing Datadog’s upcoming earnings report to gauge the company’s performance and to better understand the potential impact of the issues raised by Stifel’s analyst on its future growth trajectory.
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