Shares of Datadog Inc. remained resilient despite a recent downgrade from Wells Fargo. The market saw positive implications for the observability company following Amazon.com Inc.'s latest cloud-computing results.
Optimized Spending Trends
In its forward-looking commentary, Amazon highlighted an optimistic outlook for its AWS cloud-computing business. The company acknowledged that customers are still "optimizing" their spending, but these optimization trends are starting to taper off.
TD Cowen analyst, Andrew Sherman, commented that AWS's third-quarter performance met expectations. Additionally, Microsoft Corp.'s Azure cloud-computing business also surpassed expectations earlier in the week.
Positive Implications for Datadog
Sherman believes that these strong results from major hyperscalers have a positive read-through for Datadog (DDOG). He maintains an outperform rating with a target of $120 on the stock. Sherman adds that there has been a shift in consensus towards the short side, which improves the overall setup. This is especially notable considering the lack of a rally following Azure and AWS's performance.
Datadog's Growth and AWS Partnership
Sherman highlights that the "vast majority" of Datadog's customers operate on AWS. Notably, Datadog's growth as a multiplier of AWS growth has been 2.1x over the past two quarters.
Based on AWS's 12.3% growth in the third quarter, Sherman estimates that Datadog's growth will be around 26%. This exceeds the high-end of the company's guidance of 20%.
Despite the Wells Fargo downgrade, Datadog shares rose slightly by just over 1% on Monday, while Amazon shares also saw an increase.
Overall, these positive indications from major players in the cloud-computing industry bode well for Datadog's future prospects.
Datadog's Performance and Analysts' Perspectives
Datadog, a popular cloud monitoring platform, has recently faced contrasting performance in the market. While Amazon shares experienced a significant boost, Datadog's performance remained muted. Analysts have different perspectives on the situation, with some concerns about a potential disconnect between Datadog and AWS.
Peter Weed's View
Bernstein analyst Peter Weed finds Datadog's performance puzzling. He believes that many investors still have misconceptions about the supposed disconnect between Datadog and AWS in the previous quarter. According to Weed, worries about Datadog's weakness and a potential disconnect are not significantly impacting its performance in Q3. He maintains an outperform rating on the stock and sets a target price of $133.
Andrew Nowinski's Concerns
On the other hand, Wells Fargo analyst Andrew Nowinski holds a more cautious view regarding Datadog's stock. He downgraded his rating from overweight to equal weight, pointing out a potentially "too aggressive" setup for fiscal 2024. Nowinski highlights cost optimization trends that have affected revenue growth over the past year, which he believes will persist beyond 2024. Recent comments from Google and Microsoft support this view. While acknowledging that Datadog's monitoring workloads are mission-critical and less prone to cost optimization, Nowinski suggests that overall cost optimization slows down the migration of new applications to the cloud, influencing the expansion rates of Datadog.
In light of the contrasting performance and analyst perspectives, only time will tell how Datadog navigates the challenges ahead. While Weed remains optimistic about building momentum and supports his model for Datadog based on AWS's third-quarter results and forward commentary, Nowinski emphasizes the long-term effects of cost optimization on Datadog's growth potential. As the market continues to evolve, the future of Datadog remains uncertain.