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Datadog (DDOG -8%) fetches a lower price today after its FY25 guidance misses the mark. The SaaS company, allowing clients to monitor their IT infrastructure, tends to already guide somewhat conservatively, basing its forecasts on trends observed in recent months and then applying conservatism to these growth trends. As such, FY25 earnings and sales projections, predicting $1.65-1.70 and $3.175-3.195 bln, respectively, both below consensus, are fueling a significant pullback today.

• While guidance was disappointing, most of DDOG's Q4 report was uplifting. The company topped earnings and sales estimates again in the quarter, a recurring theme, delivering adjusted EPS of $0.49 and revs of $737.73 mln, a 25.1% jump yr/yr, consistent with the past six quarters.
• Usage growth from existing customers mirrored what DDOG noticed in the year-ago period, starting strong and slowing down toward the end of December. Management remarked that the business environment remained stable. Enterprise customers continued to underpin usage growth, exhibiting outsized strength, while growth remained stable across small and medium-sized businesses (SMBs), posting a slight yr/yr uptick compared to Q3.
• Customer growth was strong. DDOG added 800 net customers in Q4, pushing its total to around 30,000. Customers with annualized recurring revenue (ARR) of $1 mln or more jumped by 17% yr/yr to 462, and those with ARR of $100K or more increased by 13% to 3,190. Notably, DDOG posted the highest number of new logo annualized bookings since 2023.
• Also robust was the contribution from AI-native customers, which represented around 6% of Q4 ARR, around the same as last quarter but up 3 pts from the year-ago period. DDOG mentioned in Q3 that AI-native customers are ramping rapidly, potentially leading to increased commitments over time with better terms. While a positive long-term development, DDOG warned that this could create near-term revenue volatility. Management noted today that growth from this cohort was largely stable from last quarter, keeping this development in play.
• Furthermore, on AI, a trend that unfolded during this earnings season was that three major hyperscalers, including Amazon (AMZN), Microsoft (MSFT), and Google (GOOG), missed their Q4 cloud revenue forecast. These tech giants touched on capacity constraints on the AI side of their businesses but noticed a normal pattern of cloud migrations on the non-AI side. DDOG mentioned that it is growing faster than cloud providers, even though they show signs of slowing. Management added that it continues to expect outperformance due to broad-based cloud transformations.

DDOG's Q4 report was mostly positive. However, for a company trading at a pricey 71x forward earnings multiple ahead of its Q4 report, its weak guidance was sufficient to ignite meaningful selling pressure today. That said, DDOG remains a leader in the IT observability market. While an uptick in AI-native customers creates near-term headwinds, it should ultimately form a sturdier base for longer-term growth.