Bernstein downgrades Datadog on valuation concerns despite stronger AI outlook

Investing.com -- Brokerage Bernstein downgraded cloud monitoring software company Datadog to "Market-Perform" from "Outperform" on Monday, saying the stock's recent rally has outpaced its improving fundamentals even as the company stands to benefit from growing artificial intelligence adoption.

Bernstein raised its price target on Datadog to $226 from $180, reflecting higher long-term revenue forecasts and stronger expectations for AI-related demand. However, the new target remains below the stock's July 2 closing price of $260.36, implying roughly 13% downside, prompting the downgrade.

The brokerage said Datadog continues to execute well in observability software and is expanding its opportunities in AI infrastructure and cybersecurity, calling the company an "AI winner" with declining disruption risk from emerging technologies. Bernstein also increased its estimates for revenue from AI-native customers after becoming more optimistic about demand from AI laboratories.

However, the firm warned that investor expectations have become overly optimistic, citing signs of slowing enterprise demand outside AI and indications that growth at some AI labs is beginning to plateau. Bernstein expects Datadog's revenue growth to slow sharply in the fourth quarter as the company faces tougher comparisons and moderating AI demand.

The brokerage forecasts Datadog's year-over-year revenue growth could fall to about 29% in the fourth quarter, compared with investor expectations for growth to remain above 30% into next year. It also expects growth in the company's non-AI business, which accounts for roughly 85% of revenue, to peak in the third quarter before slowing.

Bernstein said recent web traffic indicators and channel checks point to slowing cloud workload growth, citing hyperscaler capacity constraints and customers prioritizing cybersecurity improvements, although it expects longer-term AI adoption to remain a key growth driver.

Despite the near-term caution, Bernstein raised its long-term revenue growth assumptions by several percentage points and said Datadog could return to stronger growth once the expected slowdown passes, but believes the current valuation already reflects much of that optimism.

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