Datadog's FY24 Revenue Consensus Do Not Align With Management's Historical Guidance Trends - This Analyst Downgrades Stock

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Wells Fargo analyst Andrew Nowinski downgraded Datadog Inc (NASDAQ:DDOG) from Overweight to Equal-Weight and lowered the price target from $120 to $95.

The analyst's thesis reflects four fundamental tenets. First, the cost optimization trends persist and will likely last for a few more quarters into 2024. Second, the FY24 consensus revenue estimates do not align with management's historical guidance trends. 

The third tenet is his belief that Datadog can gain share following Cisco Systems, Inc's (NASDAQ: CSCO) acquisition of Splunk Inc (NASDAQ: SPLK). Finally, he notes Datadog's new AI-based solutions could become significant, long-term growth drivers. 

The analyst noted that the cost optimization trends that pressured revenue growth over the last year continue to persist and will likely continue into 2024. 

Recent comments from Alphabet Inc (NASDAQ: GOOG)(NASDAQ: GOOGLGoogle, and Microsoft Corp (NASDAQ: MSFT) align with this view. 

While one can argue that the workloads Datadog is monitoring are mission-critical and, therefore, not cost-optimized, Nowinski notes that cost optimization slows the migration of new applications to the cloud, impacting the expansion rates of Datadog. 

The analyst notes that the FY24 consensus revenue estimates do not align with management's historical guidance patterns. 

Nowinski also notes that Datadog can gain a share in both the Log Management and the broader Observability market segments, mainly at the expense of Cisco/Splunk. Resellers are already seeing customers of Cisco and Splunk migrating away to Datadog, which should continue. 

Also Read: Datadog Poised To Exceed Expectations Over Long-Term, Says Piper Sandler Analyst

The analyst notes that the new AI-based solutions are unique in the market, particularly the two AI Observability solutions and the "Bits AI" assistant, which should translate into incremental revenue growth.

Nowinski projects Q3 revenue of $523 million vs. consensus $524.16 million and EPS of $0.34 in line with the consensus.

Price Action: DDOG shares are trading lower by 1.63% at $80.24 on the last check Monday.

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