Facing challenges of slowing growth and increased investment, Wells Fargo downgraded Datadog's rating to "Market Perform."
Wells Fargo downgraded Datadog's rating from "Overweight" to "Market Perform," with a target price reduced from $152 to $140. The reason is the expectation that revenue growth will slow to 18-19% in 2025, higher than the previous expectation of over 20%, while operating expenses are expected to rise to over 20% to invest in large enterprise opportunities. Despite the fourth-quarter performance exceeding expectations, the revenue and earnings per share forecasts for 2025 are both below market consensus
According to Zhitong Finance APP, after Datadog (DDOG.US) released its fourth-quarter financial report and outlook, Wells Fargo downgraded its rating from "Overweight" to "Market Perform" due to a slowdown in growth in 2025 and increased investment spending, and lowered its target price from $152 to $140.
Wells Fargo analysts Andrew Nowinski and Vinod Srinivasaraghavan stated, "Datadog reported solid performance, but it expects revenue growth of 18-19% year-over-year for fiscal year 2025 (below our expected 20%), while also detailing plans to raise operating expenses to over 20% to invest in large enterprise opportunities. The slowdown in growth, uncertainty regarding AI contribution growth, and the decline in operating margin/free cash flow margin will make it difficult to maintain a high-end multiple of over 10 times enterprise value/sales."
For the fourth quarter ending December 31, Datadog's non-GAAP earnings per share increased approximately 11.3% year-over-year to $0.49, while revenue grew approximately 25% year-over-year to $738 million. Both revenue and profit exceeded expectations.
However, looking ahead to the entire year of 2025, the company expects a revenue midpoint of $3.185 billion, below the market consensus expectation of $3.24 billion. Datadog expects a midpoint of $1.68 for earnings per share in 2025, lower than the market consensus expectation of $1.98.
"For a company of Datadog's size, its penetration rate among Fortune 500 companies is relatively low (45% for fiscal year 2024, compared to 42% for fiscal year 2023), and management sees opportunities to expand enterprise penetration," the firm stated. "Therefore, management plans to increase investments in research and development (R&D) and sales and marketing (S&M), leading to overall operating expense growth exceeding 20% for fiscal year 2025, far above revenue growth expectations."
