Most people only think about the software behind their apps when something breaks. A checkout page freezes or a banking app spins. Somewhere, an engineer opens a dashboard to find the fault.
At thousands of companies, that dashboard comes from Datadog Inc. (DDOG).
Demand for the service is strong. Revenue jumped 35% to $1.20 billion in the third quarter, according to the company’s earnings release. It shows that customers are still spending more to keep their apps and AI tools running.
The trouble sits at the top of the customer list. Datadog expects fourth-quarter revenue to be roughly flat compared with the third, largely because of a few very large clients. One of them is big enough to swing the outlook alone.
That tension runs through a Nov. 5 Morgan Stanley (MS) research note shared with TheStreet. In “3Q26 Results: Core Acceleration Overshadowed by AI-Native Volatility,” analysts Sanjit Singh and Adam Wood kept an Overweight rating on Datadog. They cut their price target to $270 from $300.
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One customer can now swing Datadog’s forecast
Datadog’s largest customer, an AI company it has not named, cut its usage in the third quarter. It still spent well above the minimum its contract requires, the note said. Management built its fourth-quarter forecast on the assumption that the customer would pay only the minimum anyway.
On the earnings call, management said the customer can’t spend below its minimum but can land anywhere above it. Put simply, Datadog is counting that customer at the lowest level its contract allows.
Datadog’s forecast implies fourth-quarter growth of 25% to 26%, according to the note. Excluding the largest customer, management said implied growth sits in the low to mid 30s. That gap of several percentage points traces back to a single account.
Bigger deals are arriving with lower prices
The largest customer is only one part of the problem. The other part comes from big AI customers, several of which renewed early and committed to spend much more, the note said. In return, they won better volume pricing.
That trade locks in bigger commitments but stings now. Existing usage bills at the lower rate, trimming near-term revenue, according to Morgan Stanley. Answering Singh on the call, CFO David Obstler said, “we essentially extend and increase the commit, but do better pricing for that.”
Rapidly scaling AI customers are renewing early and earning bigger volume discounts as they grow, according to Morgan Stanley. Another such renewal landed in October, so the pressure carries into this quarter.
The pool of AI buyers is widening, though. Datadog now counts more than 850 AI customers, up from more than 750 a quarter earlier, according to the note. Management expects that broader base to steady results over time, the note added.
Datadog’s everyday customers are speeding up
Strip out AI customers entirely, and the picture changes. Growth from customers outside AI accelerated for a fifth straight quarter, reaching the high 20s, according to the note. A year ago, it was about 20%.
That speed-up is the cleaner signal, since it rests on a broad base rather than a few big contracts. About 26% of all customers now use eight or more Datadog products, up from 16% a year earlier, the note said. Each added product makes Datadog harder to replace, embedding it more deeply in customers’ systems.
Morgan Stanley reads the quarter the same way. The analysts called the softer outlook “more reflective of customer-specific pricing / commitment dynamics than a deterioration in underlying demand.” They also think the monitoring market “is having its best year in several years.”
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Morgan Stanley sees Datadog stuck until a key renewal
Investors did not wait for that case to play out. Datadog shares fell about 14% on Nov. 4, the day it reported, according to SiliconANGLE. It was the second straight quarter in which a strong report failed to lift the stock.
Morgan Stanley expects the shares, now far below their 52-week high of $300.68, to stay range bound for now. The analysts think Datadog’s first forecast for next year will come in below 25% growth. It will likely count only three quarters of revenue from the largest customer, whose contract comes up for renewal.
The analysts believe the customer will likely renew. With high-20s growth outside AI and 50% to 100% growth from other AI customers, they see a path to about 30% growth in 2027.
Their $350 bull case assumes Datadog wins as companies consolidate monitoring tools. Their $135 bear case assumes tougher competition squeezes growth and margins.
Datadog’s problem could be a preview for other software makers that sell to AI companies. The biggest of these buyers spend enough to command volume discounts, as Datadog’s early renewals show.
Vendors that win them will need a broad base of everyday customers to absorb each renegotiation.
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