Q1 Earnings Catalyst: Datadog's Low Short Interest Sets Up a Tactical Squeeze Play

The catalyst for Datadog's recent volatility is clear: its Q4 2024 earnings report. The stock tumbled 7% to about $137.50 in early trading after the bell, a sharp reaction to a report that delivered strong numbers but a weak outlook. The quarter itself was robust, with revenue climbing 25% to $738 million, comfortably beating estimates. Yet the market's focus quickly shifted to the full-year 2025 guidance, which implied a significant deceleration.

The conflicting signals are stark. While Q4 revenue growth was 25%, the company's forecast for the full year pointed to just 18-19% growth. This slowdown was the primary driver of the sell-off, as investors grappled with the prospect of a transitional year. The guidance for the first quarter also showed minimal sequential growth, reinforcing the deceleration narrative.

This earnings event sets up a specific tactical dynamic. The short interest position, while not large, provides a potential fuel source for a squeeze. As of October 31, 2025, short interest stood at 9.93 million shares, representing 3.12% of the public float. More importantly, that figure showed a 7.74% decrease from the prior report, indicating short sellers were already covering positions before the earnings report. The short interest ratio of 3.3 days to cover is low, suggesting any sustained rally could force a wave of covering.

The setup is therefore a classic squeeze play. The earnings report created a clear mispricing, with the stock falling on guidance despite a beat. If Datadog can deliver a Q1 beat against the low expectations baked into the guidance, it could trigger a short-covering rally. The low short interest and recent reduction in positions mean there is limited resistance to a move higher, making this a high-probability tactical opportunity if the company can surprise on the upside.

The Squeeze Mechanics: Low Pressure, High Vulnerability

The current short interest metrics paint a picture of minimal bearish conviction, creating a setup where any positive catalyst could trigger a sharp, short-lived rally. Datadog's short interest ratio is 3.3 days to cover, a figure that sits squarely within the 1-4 range typically indicating strong positive sentiment and a lack of short-selling pressure. This means it would take short sellers just over three days of average trading volume to cover their positions. In practical terms, this low ratio suggests the market is not heavily positioned against the stock, which limits the immediate risk of a violent short squeeze.

This lack of pressure is reinforced by the short interest as a percentage of the float. At 3.12%, Datadog's figure is actually above its peer average of 2.95%, indicating slightly more bearish sentiment relative to competitors. However, this still represents a low absolute level of shorting. A short interest below 10% generally signals positive investor sentiment, and Datadog's position is well within that zone. The recent trend is also bullish, with short interest declining 7.74% in the last reporting period, showing that bearish bets are being unwound.

The bottom line is a high-vulnerability setup. With low short interest and a days-to-cover ratio that suggests minimal bearish pressure, the stock has little built-in resistance to a rally. If Datadog's recent positive momentum or any new bullish news gains traction, the path of least resistance for the price is upward. The limited number of shares that need to be bought back to cover shorts means any buying pressure can quickly move the stock higher. This creates a classic micro-cap vulnerability: the stock is primed for outsized moves on either side, but the current low short interest means the immediate risk is skewed toward a potential squeeze on the upside if sentiment shifts.

The Catalyst: Q1 2025 Earnings on May 6th

The immediate catalyst for a potential short squeeze is Datadog's upcoming first-quarter earnings report. The company has scheduled its Q1 fiscal year 2025 financial results for release before the U.S. market open on Tuesday, May 6, 2025. This event is the next major data point that could trigger a sharp move in the stock.

Analysts are forecasting a solid top-line performance, with a consensus estimate calling for quarterly revenue of $914.55 million, representing a 24% year-over-year increase. However, the key watchpoint is the growth trajectory. This forecast implies a sequential deceleration from the 25% growth seen in the fourth quarter, which means the market will be scrutinizing whether the company can maintain its momentum or if demand is softening.

The squeeze potential hinges on the stock's short interest. Datadog carries a low days-to-cover ratio of 3.3, indicating that short sellers have a relatively small position relative to the stock's average trading volume. This is a classic setup for a rapid, forced covering event. If the Q1 report delivers a positive surprise-either in revenue beating the $914.55 million forecast or in management providing optimistic guidance-the low days-to-cover ratio means short sellers would need to buy back shares quickly to cover their positions. This buying pressure can amplify any initial positive reaction into a significant short squeeze.

The bottom line is that the May 6th earnings release is the next tactical catalyst. With a low days-to-cover ratio and a clear growth forecast to beat, a beat-and-raise scenario could force a swift and sharp move higher. Investors should watch for any deviation from the consensus, particularly on the guidance front, as that will be the primary driver of the post-earnings price action.

Valuation and the Risk/Reward

The stock's recent pullback has created a tactical setup, but the underlying valuation and bearish thesis cap the potential for a sustained rally. The company trades at a forward P/E of 58.74, a significant premium to the broader market. This high multiple implies the market is pricing in robust, sustained growth. Yet the bearish thesis argues this premium is unjustified. A prominent analysis suggests a more appropriate valuation based on a 10x EV/2025E sales multiple, which would value the stock at approximately $100. That level represents a roughly 26% downside from recent trading levels, highlighting the substantial gap between current price and a bear case grounded in fundamentals.

The key risk is that a miss on the next earnings report could trigger a deeper decline. The stock's valuation is already stretched, leaving little room for error. The low short interest, at 2.62% of the float, provides little cushion against a fundamental breakdown. In a typical short squeeze, a high short interest amplifies upward moves when positive news hits. Here, the low level means there is minimal "short covering" fuel to drive a sharp, sustained pop. The stock's momentum is more likely to be driven by broader market sentiment or sector rotation than by a forced squeeze.

The bottom line is a high-risk, tactical trade. The valuation premium demands flawless execution and growth. The bearish thesis, centered on slowing growth, competitive pressures, and a wavering net revenue retention, presents a credible path to a lower multiple. For investors, the risk/reward is asymmetrical. The potential upside from a squeeze is limited by the stock's elevated price, while the downside from a fundamental miss is significant. This is not a long-term investment thesis but a short-term bet on a catalyst that may not materialize.