Datadog (NASDAQ:DDOG) just posted one of its strongest quarters in years on July 22, and the stock fell 19% anyway. Earlier on July 16, the company also launched its platform on the AWS Europe (London) Region, giving UK customers a local option for storing observability and security data. That expansion lands at an odd moment. The business keeps growing quickly and keeps signing new customers, yet the market is suddenly worried about what happens next.
Bull Case: The Growth Engine Isn’t Slowing Down Yet
Second-quarter revenue rose 36% year-over-year to $1.12 billion, faster than the prior quarter’s 32% pace and well above the high end of management’s own forecast. Adjusted earnings of 65 cents per share cleared the 57-to 59-cent guidance range too. Management responded by raising full-year revenue guidance to $4.45 billion to $4.47 billion, up from $4.30 billion to $4.34 billion, and lifted its adjusted earnings outlook to $2.50 to $2.54 per share. Customers spending $100,000 or more annually grew 23% year over year to about 4,720.
Free cash flow reached $279 million, and the balance sheet held $5.0 billion in cash and investments. On July 16, Datadog extended its reach further by launching in the AWS Europe (London) Region, giving financial services, healthcare, government, and higher education customers a way to keep data in-region while meeting governance and compliance needs. Even after news broke that its largest customer was cutting usage, Datadog kept closing seven-figure deals with other large clients.
Bear Case: Why The Market Didn’t Care About The Beat
The reaction centered on what the guidance implied for the next quarter, not the one just reported. Third-quarter guidance points to revenue of $1.135 billion to $1.145 billion, about 29% year-over-year growth against the $886 million posted in the third quarter of 2025, a sharp step down from the 36% just delivered. Part of that comes from a disclosed headwind: Datadog’s largest customer began reducing its usage, weighing directly on the forecast. GAAP operating income tells a less flattering story than the adjusted numbers, landing near breakeven at $5 million even as adjusted operating income reached $257 million. And the stock isn’t cheap regardless. Shares traded near $229 even after the drop, about 91 times the adjusted earnings management expects this year. Separately, CEO Olivier Pomel sold 127,141 shares on August 5 for about $36.5 million under a 10b5-1 plan, reducing his direct holdings by 17% to 612,747 shares, though he still holds millions of derivative shares.
What The Numbers Around The Stock Show
Hedge fund ownership climbed from 75 funds in the prior quarter to 80 in the most recent one, suggesting institutional interest grew even as the stock wobbled. Short interest sits at 4.35% of the float, a modest level pointing to limited organized skepticism. Datadog trades at a forward P/E of 97.09 as of August 10, a multiple that prices in continued outsized growth and leaves little room for the deceleration management’s own guidance now implies.
The Real Question Investors Are Asking
Datadog is still expanding its footprint, its customer base and its margins, and the London launch gives it another lever for enterprise demand in regulated industries. But the quarter that just ended matters less to the stock than the one investors think is coming, and a forecast implying 29% growth instead of 36% has changed how the business gets priced. A forward P/E near 97 leaves little cushion if the customer concentration issue behind that guidance spreads further. For the growth story to keep working, deals like the ones closed after the cut need to keep offsetting what the largest customer pulled back.
While we acknowledge the risk and potential of DDOG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DDOG and that has 10,000% upside potential, check out our report about this cheapest AI stock.
READ NEXT: 10 Best Future Stocks to Buy Under $10 and 12 Best Performing Semiconductor Stocks to Invest In.
Disclosure: None. Follow Insider Monkey on Google News.
Hedge Fund Resource Center