Datadog Earnings: Continued Demand Normalization as Usage Growth Shows Signs of Improvement

We are maintaining our $115 fair value estimate for narrow-moat Datadog after the firm reported robust financial results for the third quarter of 2023. The positive impact of these results was tempered by our lowering of aggressive long-term growth estimates, leading to our fair value estimate remaining unchanged. On the macro front, management commentary on demand stabilization indicated that the brunt of cloud optimization, which has negatively impacted Datadog's financials, may be in the rearview mirror. As a company that operates on a consumption-based model, Datadog is susceptible to optimization as customers can decrease their spend on Datadog swiftly as they tighten their own fiscal belts. Encouragingly, Datadog saw usage trends improve sequentially in the third quarter and remain strong in the first month of the ongoing fourth quarter. We view these trends as a good omen for the firm and are still modeling strong revenue growth in fiscal 2024 as demand normalization continues.