Datadog Faces Revenue And Margin Headwinds In 2025, Analyst Downgrades Stock

As the tech sector continues to evolve, so do the challenges faced by companies operating within it. Datadog (DDOG), a leading provider of observability and security platforms, is no exception. In a recent report, Stifel analyst Brad Reback downgraded the company's stock from 'Buy' to 'Hold' and lowered his price target from $165 to $140. The analyst cited several factors contributing to the anticipated revenue deceleration for Datadog in the fourth quarter of 2024 and throughout 2025.

One of the primary concerns is the optimization strategies implemented by OpenAI, a significant client of Datadog. While these strategies could support year-over-year growth, the expected annualized value of $80 million leads the analyst to anticipate only modest growth. Furthermore, the analyst foresees the possibility of a substantial quarter-over-quarter revenue decline in the first quarter, as the new contract terms take effect. This optimization by OpenAI, combined with typical pricing pressure during contract renewals and the potential for year-end customer churn, suggests that Datadog's AWS growth will likely continue to decelerate in the fourth quarter and throughout 2025.

To mitigate the potential revenue deceleration, Datadog is expected to significantly increase its sales and marketing (S&M) spending in the coming quarters. However, this increased spending could potentially lead to a decrease in operating margins, as current sell-side projections expecting operating margins in FY25 to remain stable year-over-year at around 25% may be overly optimistic. The analyst sees the risk/reward as somewhat leaning towards the downside given the belief that first-quarter guidance could be lower than current expectations, the limited upside potential to existing FY25 revenue estimates, and the potential for operating margin downside.



In light of these challenges, investors may want to consider alternative investment opportunities within the software application sector that offer a more favorable risk-reward profile. Companies such as CrowdStrike (CRWD), MongoDB (MDB), and GitLab (GTLB) have shown strong growth prospects and relatively lower valuations compared to Datadog.

In conclusion, Datadog faces revenue and margin headwinds in 2025, as indicated by the analyst's downgrade of the stock. While the company is taking steps to mitigate these challenges, investors should be aware of the potential risks and consider alternative investment opportunities within the software application sector. As always, it is essential to conduct thorough research and consider the specific risks and opportunities associated with each investment before making a decision.