What Happened?
Shares of cloud monitoring software company Datadog (NASDAQ: DDOG) fell 4.2% in the afternoon session after Guggenheim downgraded the stock to Sell from Neutral, citing risks related to its largest customer, OpenAI.
The investment firm set a price target of $105, which is significantly lower than its recent trading levels. Guggenheim analyst Howard Ma noted that OpenAI may be transitioning away from Datadog's services, particularly for log management, in favor of its own in-house solutions. This potential shift poses a revenue risk for Datadog in the second half of the year, especially in the fourth quarter. Ma estimates that optimizations by OpenAI could create a revenue gap of $150 million or more for Datadog in 2026. The downgrade comes just a day before Datadog is set to be added to the S&P 500 index.
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What Is The Market Telling Us
Datadog’s shares are quite volatile and have had 17 moves greater than 5% over the last year. In that context, today’s move indicates the market considers this news meaningful but not something that would fundamentally change its perception of the business.
The previous big move we wrote about was 5 days ago when the stock gained 14.2% on the news that the company will be added to the S&P 500 index.
S&P Dow Jones Indices announced after the market closed on Wednesday that the cloud-monitoring and security platform will replace Juniper Networks, which was acquired by Hewlett Packard Enterprise.
The change is scheduled to be effective before the market opens on July 9. Inclusion in the S&P 500 is a significant milestone for a company, often leading to a surge in demand for its stock. This is because index funds and exchange-traded funds (ETFs) that track the S&P 500 are now required to purchase Datadog shares to align their holdings with the index's new composition. This automatic buying pressure from passive investment funds is a primary driver for the stock's sharp increase. The move also enhances the company's visibility and solidifies its position as a major player in the cloud observability space.
Datadog is up 1.7% since the beginning of the year, but at $146.13 per share, it is still trading 13.4% below its 52-week high of $168.65 from December 2024. Investors who bought $1,000 worth of Datadog’s shares 5 years ago would now be looking at an investment worth $1,520.
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