Who’s a Good Stock???

Datadog DDOG ( ▼ 5.62% ) has been putting together the kind of performance that usually comes with a victory lap.

Revenue is growing. Earnings keep beating expectations. And Wall Street has been handing out compliments.

The stock has been enjoying the attention, too.

One research firm recently published “3 Big Reasons to Love Datadog.”

Another gave its valuation an F.

Same company. Very different report cards.

And therein lies the problem with being Wall Street’s favorite student.

Good grades are nice. But eventually, somebody asks about the tuition.

Datadog’s growth has been impressive. The price investors are paying for it is another matter.

So how much is too much for a company doing so many things right?

Let’s see if the numbers deserve a treat.⇩

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Straight A’s…

Datadog delivered another strong quarter, beating analysts’ expectations on both revenue and earnings.

→ Revenue: $1.12 billion, up 35.6% from a year earlier.

→ Adjusted earnings per share: $0.65, versus $0.58 expected.

→ Revenue surprise: 3.85% above Wall Street’s estimate.

→ Full-year revenue outlook: Raised to $4.45–$4.47 billion.

Not exactly detention-worthy numbers.

And this wasn’t a one-quarter fluke.

Datadog has beaten consensus revenue and earnings estimates in each of its last four quarters.

Meanwhile, the company’s business keeps expanding as organizations spend more on monitoring their cloud applications, infrastructure and increasingly complicated AI systems.

Datadog’s estimated annual recurring revenue (ARR) stands at $4.71 billion — a measure of subscription revenue expressed as a yearly amount.

That’s a substantial stream of recurring business for a company still growing at nearly 36% annually.

✱ So far, the report card looks rather impressive.

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A Very Expensive Good Boy…

Datadog has been a very good dog.

And Wall Street has been handing out treats like there’s no tomorrow.

Shares surged 99.7% over six months, reaching $258.22 on October 21.

Nearly doubling in half a year.

But all that enthusiasm comes with a rather impressive price tag.

✱ Datadog trades at 19.6 times forward sales.

That’s a forward price-to-sales multiple — how much investors pay for every dollar of revenue the company is expected to generate over the next year.

In Datadog’s case, nearly $20 for every $1 of expected sales.

And that’s revenue, mind you.

Before salaries, research expenses, cloud infrastructure costs and everything else required to keep the business running.

Now, premium valuations aren’t unusual for fast-growing software companies.

And Datadog has certainly earned some admiration.

But there’s a small complication.

✱ Growth isn’t expected to stay at its current pace.

Wall Street expects revenue to increase 30.2% in 2026, followed by 22.2% in 2027.

Still impressive.

Just a little less impressive than the year before.

And when investors are paying nearly 20 times forward sales, even a modest slowdown can make that price tag look considerably heavier.

That’s the trouble with being Wall Street’s favorite dog.

The better you perform, the better everyone expects you to perform next time.

And the analysts?

Well, they can’t quite agree on how many treats Datadog deserves. ↓

An A for Effort. An F for Price…

The company has attracted plenty of praise for its growth, but opinions get considerably more complicated when the conversation turns to its share price.

→ Bernstein: Outperform. The firm recently upgraded Datadog and raised its price target to $350, pointing to accelerating AI-related demand for cloud-monitoring software.

→ Zacks: Hold. Its #3 ranking suggests performance broadly in line with the market, with earnings estimates largely unchanged over the past month.

→ Zacks again: F for valuation. The firm’s lowest value grade, reflecting Datadog’s premium pricing relative to peers.

And then there’s the enthusiastic commentary calling Datadog an “elite software company.”

Quite the collection.

But these opinions aren’t necessarily contradictory.

Bernstein’s rating reflects its outlook for the stock. Zacks’ Hold ranking focuses on earnings-estimate revisions. Its F grade evaluates valuation relative to peers.

Different questions. Different answers.

A company can have excellent growth prospects and still command an expensive valuation.

And Datadog has already demonstrated what happens when those expectations get a little too enthusiastic.

Back in August, the company delivered another strong earnings report.

The stock’s response?

Let’s just say nobody was handing out gold stars that afternoon. ↓

The Champagne Went Flat…

On August 6, Datadog delivered earnings report that usually calls for champagne.

→ Revenue beat expectations.
→ Earnings came in ahead of estimates.
→ Management raised its full-year outlook.
→ And its biggest customer renewed.

Four reasons to celebrate.

The stock fell nearly 17%.

Apparently, Wall Street had already ordered the champagne.

The wrinkle was hiding inside that customer renewal.

Datadog’s largest customer — described by management as a leading AI company — had renewed its contract but was also reducing its software usage.

And a renewal with a smaller appetite is slightly less festive.

There was another number investors couldn’t ignore.

→ Q2 revenue growth: Approximately 36% year over year.

→ Q3 revenue growth implied by guidance: Roughly 28%–29%.

Still healthy growth. Just a slower pace.

The contrast with Datadog’s previous earnings reaction was rather spectacular.

→ May 7: Shares surged approximately 30% after the first-quarter report.

→ August 6: Shares fell nearly 17% after another earnings beat and guidance increase.

There’s no single confirmed explanation for the August selloff. Customer concentration, slower expected growth and an already demanding valuation all provided reasons for concern.

But the episode illustrates something investors occasionally learn the expensive way.

Beating expectations is considerably easier when expectations aren’t already through the roof.

And with Datadog’s next earnings report approaching, that distinction is worth keeping in mind. ↓

No Pressure, Datadog…

Datadog’s next earnings report is scheduled for November 4.

And after a year of impressive growth and rather dramatic stock reactions, Wall Street will be watching closely.

The expectations are already on the table.

→ Q3 revenue: Approximately $1.14 billion, up 28.9% from a year earlier.

→ Q3 adjusted earnings per share: $0.64, representing 16.4% growth.

→ Full-year revenue: Approximately $4.46 billion, up 30.2%.

But here’s a curious detail.

Analysts haven’t changed their quarterly or full-year earnings estimates over the past 30 days.

And the current consensus figures sit almost exactly at the midpoint of Datadog’s own guidance.

In other words, Wall Street has largely been copying the company’s homework.

Now it wants to see the answers.

The next report will offer a clearer picture of whether demand remains strong, how growth is developing outside Datadog’s largest customer, and whether management sees room to raise its outlook again.

But remember:

The company doesn’t necessarily need to disappoint for the stock to have a disappointing day.

August already demonstrated that.

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