Why is Datadog stock down 18% despite a Q2 earnings beat and guidance raise?

Datadog shares dropped nearly 18% at market open on Thursday despite the cloud monitoring and analytics company reporting better-than-expected second-quarter earnings and raising its full-year financial outlook.

The sharp decline came after the stock had reached a record closing high earlier this week, with analysts pointing to profit-taking and elevated investor expectations for 2H revenue as key reasons behind the selloff.

Some market participants cited management's third-quarter guidance, which, although above Wall Street estimates, implied a notable sequential slowdown in revenue growth compared with the first half of the year, as reason behind the stock price decline.

The software company reported adjusted earnings of 65 cents per share for the second quarter, compared with 46 cents a year earlier and ahead of analysts' expectations of 58 cents, according to FactSet.

Revenue rose 36% year over year to $1.12 billion, surpassing consensus estimates of $1.08 billion.

Full-year outlook raised, but Q3 guidance disappoints

Looking ahead, Datadog expects third-quarter adjusted earnings of between 63 cents and 65 cents per share, with revenue projected in the range of $1.135 billion to $1.145 billion.

Those figures remain above Wall Street expectations of 61 cents per share and $1.11 billion in revenue.

However, investors focused on the implied slowdown in growth after a strong first half of the year.

"Datadog just showed how expensive one quarter of deceleration can be," AInvest wrote on X.

"Q3 guidance points to roughly 29% growth. After a 94% six-month rally, the stock is down about 21% premarket. The same reset is hitting $APP (-19%), $HUBS (-23%), and $FIG (-14%). Strong results can still meet unforgiving valuations when acceleration is already priced in," the post added.

For the full fiscal year, the company raised its outlook, forecasting adjusted earnings of $2.50 to $2.54 per share and revenue between $4.45 billion and $4.47 billion.

The revised guidance is higher than its previous forecast and comfortably ahead of analysts' estimates of $2.42 per share on revenue of $4.35 billion.

Datadog has been one of the strongest-performing software stocks this year, with shares gaining more than 110% in 2026 before Thursday's decline.

The strong rally had left investors with little room for disappointment.

Evercore ISI analysts said the market reaction appeared excessive.

"The initial reaction seems a bit extreme as the company delivered solid F2Q results, and while the lack of revenue acceleration in 2H may weigh on the uber bull case, DDOG remains one of the best growth stories in software," they said.

AI demand continues to support business

Datadog remains closely tied to the expanding artificial intelligence market, providing monitoring and observability tools for AI chips, coding agents and cloud infrastructure.

Its customer base includes AI developers and major cloud providers such as OpenAI and Amazon Web Services.

The company also reported continued expansion among its largest customers.

Datadog ended the quarter with approximately 4,720 customers generating annual recurring revenue of more than $100,000, compared with 3,850 customers a year earlier.

Chief Executive Olivier Pomel said AI adoption continues to drive customer demand for the company's platform.

"Our customers are building and deploying with AI, and they are using the Datadog platform to observe, secure, and act on their AI-enabled solutions," Pomel said in the earnings release.

"We are innovating rapidly to help our customers manage rising complexity, and increasingly build autonomy into their operations."