Bernstein Comments on Datadog (DDOG.US) Q3 Financial Report: Strong Performance but Guidance "Not Surprising", Lowers AI Business Revenue Expectations

Zhitong Finance APP has learned that Bernstein released a report pointing out that although Datadog (DDOG.US) delivered strong revenue performance in Q3 FY2026, the modest upward revision of the full-year guidance left investors disappointed. At the same time, changes in usage by its largest AI-native customer (which the report speculates to be OpenAI) add a nuanced variable to Datadog’s growth outlook. As a result, Bernstein lowered its 2027-2028 ARR expectations for the AI business by about 25% and cut Datadog’s target price from $350 to $273, but maintained its “Outperform” rating.

The following summarizes the core contents of the report:

Q3 performance strong, but guidance raise “not a big surprise”

Datadog’s Q3 revenue was $1.197 billion, exceeding expectations by $57.5 million—the company’s largest ever beat (previously $50 million and $47 million in Q1 and Q2, both record highs at the time), and the first time since 2022 that the company outperformed guidance by over 5% for two consecutive quarters.

However, Bernstein believes the issue lies in the guidance: the company merely “shifted” the outperformance into the full-year outlook rather than raising the guidance by two to three times the beat as it had before. If Datadog beats Q4 guidance by another $50-60 million, its year-over-year growth in Q4 would only be about 30%-31%, lower than the 35% achieved in Q3.

AI customers show “subtle divergence”: Largest customer usage drops, other AI-native clients still expanding

The report notes that Datadog’s AI-related business is showing divergence. According to the company, non-AI revenue grew by over 20% in Q3 and accelerated about 1 percentage point quarter-over-quarter; however, revenue growth from AI-native clients slowed in Q3, mainly because its largest AI-native customer (which Bernstein speculates is OpenAI) reduced usage. Bernstein’s models indicate that this largest AI-native customer began decreasing usage on Datadog in Q3, is expected to remain low in Q4, and will reset to a lower run rate.

Nevertheless, Datadog continues to sign million-dollar contracts with other large AI-native clients, whose usage expansion remains strong. Bernstein’s previous AI-native client revenue model overestimated Q3 revenue by about $34 million, with $20 million attributable to timing differences—meaning Q3 demand intensity may be reflected with a lag in Q4 revenue; and roughly $14 million was due to an overly high model assumption for “token consumption to revenue ratio.” The updated model now accounts for a one-quarter lag effect.

Management communication: Guidance for largest client turns conservative, early renewals create discount headwinds

On the post-earnings call, Datadog’s management said Q4 guidance for the largest client is based entirely on contract minimums and does not reflect recent usage trends. Management emphasized that this should not be interpreted as a further consumption slowdown. Guidance for 2027 will also continue to exclude upside assumptions for the largest client.

Additionally, some fast-growing customers (including AI-native clients) renewed ahead of schedule after exceeding consumption commitments to lock in deeper discounts. This resulted in lower short-term unit revenue at Datadog, creating about $15 million of discount headwind for Q4 guidance. Management noted that it typically takes about one quarter for consumption to return to pre-discount revenue levels, but this mainly reflects strong usage and larger commitments, not weakening demand.

Based on the above AI revenue adjustments, Bernstein lowered its 2027-2028 ARR forecast for the AI business by about 25% while keeping the rest of the model unchanged. The report also indicates that despite short-term headwinds from AI-native customer usage volatility and renewal discounts, Datadog’s core growth trend remains healthy, non-AI business growth is solid, and early Q4 signals suggest demand may be improving, setting the stage for potential growth in Q1 2027.