Datadog DDOG is experiencing a selloff today, despite reporting robust Q2 results. The company surpassed earnings per share (EPS) expectations, with revenue rising 35.6% year-over-year to $1.12 billion, exceeding forecasts. For Q3, DDOG forecasts EPS between $0.63 and $0.65, with revenue expected to be between $1.135 billion and $1.145 billion, both above expectations. However, the Q3 revenue midpoint suggests less than 2% sequential growth, following an 11% increase in Q2, as its largest customer is anticipated to decrease usage starting in Q3. This expected slowdown is contributing to today’s stock decline, overshadowing otherwise strong results.
- Demand: Revenue growth accelerated across DDOG's customer base. The AI-native segment is expanding in both number and scale, while non-AI customer revenue growth has risen to the high-20% range from the mid-20% range last quarter, reflecting ongoing trends in cloud migration, modernization, and AI adoption.
- Key Metrics: Billings rose 38% year-over-year to $1.18 billion, while remaining performance obligations (RPO) increased 43% to $3.47 billion. The adjusted operating margin expanded by 300 basis points to 23%, with Q3 guidance suggesting a margin of 23-24%.
- Customer Activity: DDOG concluded the quarter with around 33,400 customers, including 4,720 generating at least $100,000 in annual recurring revenue (ARR), a 23% increase year-over-year. New enterprise bookings more than doubled, with new customers contributing approximately 30% to Q2's year-over-year revenue growth, up from 25% in Q1. Net revenue retention remained stable in the low-120% range.
- AI Adoption: DDOG now has over 750 AI customers, including 31 spending more than $1 million annually and eight exceeding $10 million. The usage of its agent, LLM, and GPU monitoring products is rapidly increasing, with agentic activity surging, evidenced by a more than 22-fold rise in MCP tool calls since Q4 2025.
- Outlook: DDOG has mitigated risks associated with lower usage from its largest customer through year-end. This customer has renewed a significant deal and utilizes 17 DDOG products, indicating a reduction in consumption rather than a loss. DDOG also reports ongoing growth across its broader business.
Despite the expected slowdown reflected in Q3 guidance, the quarter demonstrated strong underlying demand. The expansion of DDOG's AI-native customer base and accelerated growth in non-AI customers indicate a broadening strength beyond a limited group of AI leaders. Strong new-logo bookings, stable retention, and increased customer spending suggest continued enterprise adoption and platform growth. While the anticipated usage reduction from DDOG's largest customer poses a near-term challenge, it appears to be more customer-specific rather than indicative of widespread weakness. Overall, the raised FY26 outlook and sustained growth across the business solidify DDOG's status as a vital observability and security platform for complex cloud and AI workloads. With shares nearing all-time highs and nearly doubling year-to-date, the current weakness likely reflects profit-taking following a strong quarter.
This stock alert was generated using automated technology and GuruFocus financial data to provide readers with timely and accurate market reporting. This content was reviewed by GuruFocus editorial team prior to publication. Please send any questions or comments about this story to [email protected].
