Loop Capital Sees Modest Revenue Upside for Datadog, Reiterates Buy Rating

Loop Capital analysts reaffirmed their Buy rating and set a $160 price target on Datadog (NASDAQ:DDOG) stock. The analysts expect modest revenue growth for the quarter, similar to the previous Q1 earnings, based on steady usage trends in non-AI workloads and favorable spending trends for new cloud deployments in the first half of the year. These deployments are expected to ramp up new workloads in the second half, contributing to Datadog’s positive growth trajectory, with GenAI-related workloads providing additional support.

Feedback from Datadog’s user group conference, Dash, was positive, with customers and partners praising the company's core products and overall product strategy, especially in monitoring serverless workloads. An emerging trend of enterprise standardization in the cloud observability market is leading to larger deal sizes, with opportunities reaching high seven-figure and eight-figure annual contract values (ACV). Datadog is expected to be the primary beneficiary of this trend.

However, the analysts noted the absence of Microsoft Azure at Dash, reflecting an inconsistent relationship between Datadog and Microsoft over the years. While Datadog’s strong product portfolio currently sustains its positive business momentum without Microsoft's strategic partnership, the analysts raised concerns about the company's ability to consistently manage large deal executions, particularly as large deals on Azure increase.

A strong partnership with Microsoft, known for its successful execution of large enterprise deals, could be invaluable in mitigating execution risks for Datadog’s large deal activities. Despite these concerns, the analysts believe these risks will not impact Datadog’s business momentum for at least another couple of years. Overall, they view Datadog as the undisputed leader in a strategically important technology segment, well-positioned to become one of the next tech bellwethers.