AI native customers increased cloud monitoring, but uncertainly about OpenAI still remains. Morgan Stanley cautiously bullish on Datadog (DDOG.US).

Focused on cloud monitoring and data analysis solutions, software giant Datadog (DDOG.US) announced its latest performance last week. After the company reported strong performance and future outlook exceeding expectations, Wall Street financial giant Morgan Stanley reiterated its "neutral" rating on the company, but raised its profit expectations and reiterated a target stock price of $165, indicating a potential upside of over 20% in the next 12 months. The latest performance data from Datadog shows that the company's total revenue for the second quarter was approximately $827 million, a 28% year-on-year increase, higher than Wall Street's general expectation of $790 million. Q2 adjusted diluted earnings per share were $0.46, also higher than Wall Street's expectations. In terms of performance outlook, Datadog's management expects total revenue for Q3 to be between $847 million and $851 million, with adjusted earnings per share of $0.44 to $0.46, which is higher than the general Wall Street expectations of $819 million and $0.42 per share. For the full year 2025 performance outlook, the company raised its performance outlook by approximately $92 million, with current total revenue expected to be between $3.31 billion and $3.32 billion, and adjusted earnings per share expected to be between $1.80 and $1.83 stronger than the general Wall Street expectations of $3.24 billion and $1.70 per share. The company also raised its profit expectations, increasing the operating profit guidance for the 2025 fiscal year from a previous range of $625 million to $645 million to a range of $684 million to $694 million, corresponding to an operating profit margin of around 20.8%. Datadog, headquartered in the United States, is a SaaS provider focusing on cloud-native monitoring, observability, and cloud platform security systems. It provides an integrated cloud monitoring platform for large software engineering, operations, and security solution teams to monitor infrastructure and cloud computing applications, collect and analyze metrics/logs/trace data, and perform real-time alerts and security analysis. The company's major customers mainly come from industries with high requirements for online stability and security monitoring, and large-scale usage of cloud computing platformssuch as internet/software and IT services, media and communications, retail e-commerce, financial services, manufacturing, and logistics industries. Publicly reported customer cases include major enterprises such as Samsung, NASDAQ, and Comcast. Datadog is considered by Wall Street giants like Morgan Stanley as one of the "big winners" in the global AI boom mainly because the company integrates "AI application software itself" and "core operations teams' workflows" into a large-scale cloud platform for monitoring, observability, and automated response. For example, Datadog's observability cloud product for LLM/generative AI applications has been mass-produced, supporting tracking of prompt chains, error attribution, cost and quality monitoring, and continues to iterate to monitoring/experiment/control consoles for Agentic AI, aligning directly with the enterprise's AI application trends over the past two years. Morgan Stanley's assessment of Datadog's performance report: flourishing in a broader AI ecosystem In its research report, Morgan Stanley stated that the revenue growth rate year-on-year accelerated from 25% in the first quarter to 28% in the second quarter, reflecting the unexpected growth trend of Datadog's cloud subscription services among AI-native major customers. In addition, the new performance outlook's upper end is expected to grow by about 24% year-on-year (previously 20.5%), as well as the raised profit outlook. Morgan Stanley emphasized that this upward trend indicates the company's increased confidence in the growth of second-half performance. Morgan Stanley pointed out that Datadog's development of AI-native customer groups is accelerating and becoming more diversified this customer group now contributes about 15% of the company's revenue, not only relying on the largest customer, OpenAI. Among these AI-native customers outside of OpenAI, there are already hundreds of long-term users of Datadog's products, with over a dozen customers spending more than $1 million annually. While uncertainties remain regarding the fate of OpenAI contracts the potential significant impact of OpenAI developing/optimizing its cloud monitoring system on Datadog, Morgan Stanley is still encouraged by the strong growth of the AI-native customer group. However, in the short term, they remain cautiously optimistic about the negative impact of OpenAI's self-development on Datadog's performance. However, Morgan Stanley's research team noted that uncertainties related to OpenAI's business growth may continue to suppress stock price performance in the short term. But as non-OpenAI business growth starts to turn upwards, Morgan Stanley will adopt a more optimistic bullish position. In addition, cloud giants like Amazon.com, Inc. AWS and Microsoft Corporation Azure are increasingly focusing on their own performance monitoring and observability competitive products, indicating that competition in this space may intensify, impacting Datadog's growth rate and market share; the continuously evolving IT infrastructure environment may also slow down the expansion pace of existing customers, affecting the growth of new business. It is reported that AWS and Microsoft Corporation Azure are strengthening their own cloud monitoring/APM suites (such as Amazon CloudWatch + Application Signals, Azure Monitor + Application Insights), emphasizing a positioning of "end-to-end, native, and deeply integrated with proprietary cloud platforms"; this undoubtedly increases the competitive pressure on Datadog, posing challenges to its growth rate and market share. Morgan Stanley believes that Datadog has a leading product positioning and vast market opportunities, and will continue to maintain rapid performance growth in the medium to long term, with risks and opportunities being balanced in the short term. Currently, Datadog has consolidated its position as a leading observability cloud monitoring platform in the modern cloud environment, opening up strong long-term tailwinds brought by the shift to the cloud for modern performance monitoring needs. The penetration rate in the related market is still relatively low, with Morgan Stanley estimating a potential market size exceeding $35 billion. However, Morgan Stanley also acknowledges the possibility of a significant slowdown in performance growth starting in the latter half of 2025 if there are major changes in OpenAI contracts, until the demand for AI inference computing power on the edge fully unleashes as a major catalyst, the potential for upside and downside in stock price remains relatively balanced, which is the main reason for Morgan Stanley maintaining a "neutral" rating. In the most optimistic scenario, Morgan Stanley assumes Datadog becomes the leading integrated player in the observable cloud monitoring market, driving sustained high growth. In this bullish market expectation, Morgan Stanley expects the company's revenue to achieve a three-year compound annual growth rate of about 26% from 2024 to 2027, reaching approximately $5.3 billion in revenue by 2027, operating profit margin increasing to 27%, and free cash flow margin potentially rising to 29%, corresponding to a total free cash flow of around $1.55 billion in 2027 (approximately $4.09 per share). Therefore, in the most optimistic scenario, Morgan Stanley assigns the company a high target price of $216.