Datadog falls on Guggenheim downgrade despite upcoming S&P 500 debut: read why

Datadog shares dropped by over 5% in early trading on Tuesday to $144.70 after Guggenheim downgraded the cloud monitoring and security firm from “neutral” to “sell,” warning of potential downside risks tied to OpenAI's shifting technology strategy.

The downgrade lands just a day ahead of Datadog's entry into the S&P 500 Index on July 9, replacing Juniper Networks, which was acquired by Hewlett Packard Enterprise.

The New York-based company’s entry into the S&P 500 is widely seen as a validation of its growth trajectory, often translating to a short-term stock boost due to the influx of buying from index-tracking funds.

However, Guggenheim’s cautious outlook has cast a shadow over that optimism, raising questions about whether some of Datadog’s top-line growth is at risk.

OpenAI seen shifting away from Datadog tools

Guggenheim analyst Howard Ma, who issued the rare "sell" rating, lowered his price target to a street-low of $105, roughly 31% below Monday’s close.

Ma warned that OpenAI, which he identifies as Datadog’s largest customer, maybe in the process of moving away from the company’s observability products in favour of in-house solutions that reduce cost.

According to Ma, OpenAI may have already transitioned away from Datadog’s log management features and could begin retiring other services in the near future.

If confirmed, the shift could result in a revenue shortfall in the second half of 2025, particularly during the final quarter.

Looking further ahead, Ma estimates the potential impact at around $150 million in lost revenue by 2026.

That would lower Datadog’s growth rate to approximately 15%, trailing current analyst expectations of 19% for that year.

Bullish analysts focus on AI and growth momentum

Despite Guggenheim’s bearish position, the broader analyst community remains upbeat.

Data compiled by LSEG shows that out of 44 analysts covering Datadog, the average rating is a “buy,” and the median price target stands at $136.

The stock is up 6.7% year-to-date, outperforming the Nasdaq Composite’s 5.7% gain.

Bank of America Securities reaffirmed its confidence in Datadog earlier this week, raising its price target to $175 while maintaining a “buy” rating.

The firm argued that inclusion in the S&P 500 reinforces the strength of Datadog’s business and doesn't alter its bullish view.

Wedbush echoed that sentiment last week, boosting its target to $170, citing Datadog’s leadership in observability and AI integration.

Index inclusion expected to draw institutional flows

Datadog’s addition to the S&P 500 is expected to attract significant passive investment from index-tracking ETFs and mutual funds.

This automatic demand tends to lift stock prices, with historical gains ranging from 5% to 15% between the index inclusion announcement and the effective date.

Over the long term, membership in the index enhances a company’s profile, increases institutional coverage, and expands its investor base, offering both visibility and liquidity benefits.