Datadog (DDOG) Earnings Preview: Can Strong Customer Growth and AI Optimism Push Shares Higher?

Datadog (DDOG), a leading observability and security platform provider, is set to report its fourth-quarter 2024 earnings before the market opens tomorrow. Investors have been cautiously optimistic, as shares have climbed in recent weeks, driven by expectations of continued solid revenue growth, strong enterprise adoption, and the company’s AI-related expansion. However, concerns over margin pressure and conservative guidance have led to selling pressure in previous quarters, raising questions about whether Datadog can maintain its momentum.

With the cloud computing sector showing mixed signals—Amazon Web Services (AWS) maintaining steady 19 percent year-over-year (CC) growth, while Microsoft’s Azure growth came in at the low end of expectations—Datadog’s report will provide crucial insights into the health of enterprise IT spending, AI adoption, and observability demand. This report examines Datadog’s recent performance, key earnings expectations, and potential market reaction scenarios.

Q4 Expectations: Steady Growth, Margin Concerns

Analysts project that Datadog will report Q4 revenue of $714.53 million, representing a 21 percent year-over-year increase, while adjusted earnings per share (EPS) is expected to be $0.43, a slight 2 percent drop from last year. The company has historically provided conservative guidance, meaning there could be upside surprises. Key areas to watch include:

- Customer Growth: In Q3, Datadog reported that large customers (those with annualized recurring revenue over $100,000) grew 12 percent year-over-year to 3,490. Continued strength in enterprise adoption will be crucial for sustaining revenue expansion.

- SMB Stability: While enterprise clients have been the primary growth driver, small and medium-sized business (SMB) customers have remained stable. Any sign of slowdown in this segment could offset positive momentum from enterprise growth.

- Hyperscaler Impact: Datadog partners with major cloud computing providers, including Amazon AWS and Microsoft Azure. AWS growth remained strong in Q4, but Azure’s lower-end growth could signal some softness in enterprise cloud spending.

- Margin Pressures: In Q3, gross margins declined by 100 basis points to 81.1 percent as the company ramped up investments in AI, product development, and talent acquisition. Investors will be closely watching whether Datadog can stabilize margins while maintaining strong revenue growth.

Key Earnings Catalysts: AI, Enterprise Expansion, and Product Adoption

Datadog has been aggressively expanding its AI-driven observability and security solutions, which have resonated well with enterprise customers. The company’s investments in real-time monitoring, AI-powered insights, and automation have positioned it as a leading player in cloud observability.

Several factors could support an earnings beat and drive further upside:

1. Enterprise Customer Growth

Datadog has been steadily increasing its penetration into large enterprises, which tend to generate higher recurring revenue and longer contract commitments. The trend of organizations shifting workloads to hybrid and multi-cloud environments has boosted demand for observability tools. If Datadog reports another quarter of double-digit growth in enterprise customers, it would reinforce investor confidence in long-term expansion.

2. AI-Powered Product Growth

Datadog has integrated AI and machine learning into its observability and security solutions, allowing enterprises to automate incident detection, monitor system performance, and optimize cloud costs. The AI boom has helped drive adoption, and strong product traction in this area could lift sentiment.

3. New Cloud Security Offerings

Datadog has been expanding beyond observability into cloud security, application performance monitoring, and developer tools. The company’s security-focused products, such as Cloud SIEM (Security Information and Event Management) and Cloud Workload Security, could help differentiate it from competitors and increase upsell opportunities.

Potential Market Reactions: What to Watch

Datadog shares have steadily risen since bottoming at $136.79 last month, suggesting that investors are positioning for an earnings beat. However, previous quarterly reports have led to post-earnings volatility, particularly if guidance is viewed as too conservative.

Here are three possible scenarios for how the stock may react:

1. Strong Beat and Upbeat Guidance (Bull Case)

- Q4 revenue and EPS exceed expectations, driven by strong enterprise adoption, AI-driven product growth, and resilient cloud spending.

- Customer metrics remain robust, with double-digit growth in large enterprise clients.

- Q1 and full-year 2025 guidance is above consensus, reinforcing confidence in Datadog’s long-term growth trajectory.

- Stock reaction: Shares jump toward December’s highs (~$170+), reflecting optimism around Datadog’s positioning in the AI-driven cloud computing space.

2. In-Line Results with Conservative Guidance (Neutral Case)

- Q4 revenue and EPS meet expectations, but guidance comes in at the lower end of estimates (a pattern seen in past quarters).

- Customer growth is stable, but margin pressures persist due to ongoing investments in AI and product development.

- Stock reaction: Shares trade sideways or pull back slightly (~$140-$145), as investors digest the balance between near-term spending and long-term growth.

3. Revenue Miss or Weak Guidance (Bear Case)

- Q4 revenue or EPS misses expectations, signaling softening demand in the observability sector or slower-than-expected AI adoption.

- Weak Q1 guidance raises concerns about slowing IT spending or cloud budget cuts among large enterprises.

- Stock reaction: Shares fall toward the 200-day moving average (~$127-$130), as concerns over weaker customer expansion and slowing enterprise spending weigh on sentiment.

Long-Term Investment Outlook: Is Datadog a Buy?

Datadog remains one of the strongest players in the observability and cloud security markets, benefiting from secular trends in cloud computing, AI-driven automation, and cybersecurity. While short-term volatility around earnings is common, the company’s strong customer base, continued product innovation, and expansion into new verticals make it an attractive long-term investment.

Key reasons to remain optimistic about Datadog:

- AI-driven observability is a high-growth sector, and Datadog has a first-mover advantage in AI-powered monitoring solutions.

- Enterprise customer expansion continues to accelerate, driving higher recurring revenue and long-term contract value.

- Strong partnerships with Amazon AWS, Microsoft Azure, and Google Cloud position Datadog well for future growth.

Potential risks to watch:

- Margin compression could limit near-term profitability, as the company invests aggressively in product development and expansion.

- A weaker-than-expected cloud computing market could slow demand for observability and security solutions.

- Stock valuation remains high, leaving little room for error if earnings growth slows.

Final Thoughts: Cautious Optimism for Datadog’s Q4

Datadog’s Q4 report will be a critical test for investor confidence, especially given concerns around margin pressure, cloud spending trends, and near-term guidance. The company has historically exceeded expectations, and a strong beat could propel the stock back toward record highs.

However, if guidance is weaker than expected, or if margins continue to decline, the stock could see post-earnings selling pressure. Investors should watch for enterprise customer growth, AI-driven product expansion, and management’s commentary on the cloud computing environment to gauge Datadog’s long-term trajectory.

For long-term investors, any near-term pullbacks could provide an attractive buying opportunity, given Datadog’s strong competitive positioning in AI-powered observability and cloud security.