Bernstein comments on Datadog (DDOG.US) Q3 earnings: strong results but guidance "not surprising enough," lowers AI business revenue expectations

Bernstein issued a report noting that Datadog (DDOG.US) delivered strong revenue performance in the third quarter of fiscal 2026, but the magnitude of the company's full-year guidance raise disappointed investors. Meanwhile, changes in usage by its largest AI-native customer (which the research report speculates is OpenAI) add subtle variables to the growth outlook. Based on this, Bernstein cut its AI business ARR forecasts for 2027-2028 by about 25% and lowered its Datadog price target from $350 to $273, while maintaining its "Outperform" rating. The following is a summary of the core content of the research report: Q3 results strong, but guidance raise "not surprising enough" Datadog's third-quarter revenue was $1.197 billion, beating expectations by $57.5 millionthe largest beat in the company's history (prior beats were $50 million in Q1 and $47 million in Q2, both records at the time), and the first time since 2022 that the beat exceeded 5% for two consecutive quarters. However, Bernstein believes the problem lies in guidance: the company merely "rolled forward" the amount of the beat into its full-year guidance, rather than amplifying the guidance raise to 2-3x the beat as it had done previously. If the company delivers another $50 million to $60 million beat in Q4, its Q4 year-over-year growth would still be only about 30%-31%, below the 35% just achieved in Q3. AI customers show "subtle divergence": usage declines at largest customer, other AI-native customers still expanding The report notes that divergence has emerged in Datadog's AI-related business. According to company disclosures, non-AI revenue grew more than 20% in Q3, accelerating by about 1 percentage point sequentially from Q2; however, revenue growth from AI-native customers slowed in Q3, mainly because its largest AI-native customer (which Bernstein speculates is OpenAI) reduced usage. Bernstein's model shows that this largest AI-native customer's usage on Datadog began to decline in Q3, is expected to remain subdued in Q4, and is resetting to a lower run rate. That said, Datadog is still signing million-dollar contracts with other large AI-native customers, whose usage expansion remains strong. Bernstein's previously built AI-native customer revenue model overestimated Q3 revenue by about $34 million, of which about $20 million was attributable to timingi.e., Q3 demand strength may be reflected in Q4 revenue with a lag; the other roughly $14 million was because the model set the "ratio of token consumption to revenue" too high. The updated model now incorporates a one-quarter lag effect. Management communication: guidance for largest customer conservative, early renewals create discount headwind On the post-earnings call, Datadog management's Q4 guidance for its largest customer was based entirely on contractual minimum usage and did not reflect the customer's recent usage trends. Management emphasized that this treatment should not be interpreted as a signal of further consumption slowdown. The company's 2027 guidance will also continue to exclude upside assumptions for this largest customer. In addition, some fast-growing customers (including AI-native customers) renewed early after consumption exceeded commitments in order to lock in higher discounts. This led to a short-term decline in Datadog's unit revenue, creating a discount headwind of about $15 million to Q4 guidance. Management said consumption typically takes about a quarter to recover to pre-discount revenue levels, but this mainly reflects strong consumption and larger commitments rather than weakening demand. Based on the above AI revenue revisions, Bernstein cut its AI business ARR forecasts for 2027-2028 by about 25% but left the rest of its model unchanged. The report also notes that despite near-term headwinds from AI-native customer usage volatility and renewal discounts, Datadog's core growth trends remain healthy, non-AI business growth is solid, and early Q4 signals suggest demand may be improving, laying the groundwork for potential growth in Q1 2027.