Datadog (NASDAQ: DDOG) saw its shares tumble nearly 18% in early trading Thursday, even after the cloud monitoring company delivered better-than-expected second-quarter results and lifted its full-year forecast. The sharp selloff came on the heels of a record closing high earlier this week, with analysts attributing the decline to profit-taking and sky-high investor expectations for the second half of the year.
The company reported adjusted earnings of 65 cents per share, up from 46 cents a year ago and ahead of the 58 cents analysts had projected, according to FactSet. Revenue climbed 36% year over year to $1.12 billion, surpassing the consensus estimate of $1.08 billion.
Despite the beat, management's third-quarter guidance—while above Wall Street estimates—implied a noticeable sequential slowdown in revenue growth compared with the first half. For Q3, Datadog expects adjusted EPS of 63 to 65 cents and revenue between $1.135 billion and $1.145 billion, versus analyst forecasts of 61 cents and $1.11 billion, respectively.
Investors, however, focused on the deceleration. As one market observer noted on X, "Q3 guidance points to roughly 29% growth. After a 94% six-month rally, the stock is down about 21% premarket. The same reset is hitting $APP (-19%), $HUBS (-23%), and $FIG (-14%). Strong results can still meet unforgiving valuations when acceleration is already priced in."
For the full fiscal year, Datadog raised its outlook to adjusted earnings of $2.50 to $2.54 per share and revenue between $4.45 billion and $4.47 billion, comfortably ahead of the prior forecast and analyst estimates of $2.42 per share and $4.35 billion in revenue.
The stock had been one of the best performers in the software sector this year, gaining more than 110% before Thursday's drop. That rally left little room for disappointment, and even a slight growth hiccup was enough to trigger a sharp correction.
Evercore ISI analysts called the market reaction "a bit extreme," noting that the company delivered solid Q2 results and remains one of the strongest growth stories in software, even if the lack of revenue acceleration in the second half may weigh on the most bullish investors.
Datadog's business remains closely tied to the expanding artificial intelligence market, providing monitoring and observability tools for AI chips, coding agents, and cloud infrastructure. Its customer base includes AI developers and major cloud providers such as OpenAI and Amazon Web Services. The company ended the quarter with approximately 4,720 customers generating annual recurring revenue above $100,000, up from 3,850 a year earlier.
CEO Olivier Pomel highlighted AI's role in driving demand: "Our customers are building and deploying with AI, and they are using the Datadog platform to observe, secure, and act on their AI-enabled solutions. We are innovating rapidly to help our customers manage rising complexity, and increasingly build autonomy into their operations."
The selloff in Datadog echoes broader turbulence in the AI trade, as seen in recent moves in AI chip stocks and futures split on cooling AI sentiment. Investors are increasingly scrutinizing valuations even for companies with strong fundamentals, as the market recalibrates expectations for growth sustainability.
This article is for informational purposes only and does not constitute financial advice.
