Datadog Stock Falls on Downgrade to Sell. Analysts Fret Over OpenAI Optimization Risk.

Revenue at Datadog could take a hit as OpenAI shifts workloads to “more cost-efficient, in-house technologies,” said Guggenheim analysts said. (Dreamstime)

Datadog stock was downgraded at Guggenheim Securities, with analysts sounding the alarm about the potential withdrawal of one of its artificial intelligence-native customers and the resulting hit on revenue.

Analysts led by Howard Ma downgraded the stock to Sell from Neutral and introduced a $105 target price. Shares slipped 4.3% to $145.86 on Tuesday.

Datadog’s name has been in the news due to its forthcoming addition to the S&P 500 index. Shares surged last Wednesday, after S&P Dow Jones Indices said Datadog would replace Juniper Networks on July 9, following Juniper’s acquisition by Hewlett Packard Enterprise. Despite Tuesday’s losses, the stock remains higher since the close on July 2, before the changes were announced.

Datadog bills itself as a cloud-based monitoring and data analytics platform. The company works with so-called AI natives like OpenAI, “which we believe is Datadog’s largest customer,” Guggenheim said. However, as the ChatGPT maker shifts toward “more cost efficient, in-house managed technologies,” Datadog’s revenue could suffer a blow as soon as the second half of the year, the analysts asserted.

In fact, Guggenheim’s checks indicate OpenAI “may have already started to move off Datadog for log management onto its internally built solution, followed by planned deprecation of other Datadog functionalities.” This migration poses the largest risk to revenue in the fourth quarter, where the firm is modeling 17% growth.

As the analysts see it, OpenAI’s retreat could create a $150 million “hole to fill” in 2026, when revenue growth slows to 15% “and that’s assuming improvement in core customer spending.” While revenue from other customers could offset this headwind, “they’re unlikely to ramp quickly enough to matter much in 2026, especially if subdued IT budget growth persists,” Guggenheim wrote.

Datadog hasn’t responded to requests from Barron’s for information about its customer composition. However, the company has alluded to OpenAI being a large client on recent calls with analysts.

Guggenheim also has a word for the skeptics. While some investors may believe that OpenAI could maintain its current rate of spending on Datadog services or renew its contract at a discount, “this may be wishful thinking.” Based on Guggenheim’s understanding, OpenAI has already built and tested the platform onto which it will shift Datadog workloads.

The firm conceded that it expects upside in the second quarter of 2025, with revenue growing 25% growth year over year, in line with trends observed in the prior quarter.

Despite the looming challenges, Datadog should be able to guide third-quarter revenue “at least in line with consensus of 18.5% growth.” The company’s full-year guidance already implies a significant deceleration in the second half of the year, Guggenheim noted.

Other firms have raised similar concerns. In January, Stifel analysts cut their rating on Datadog shares to Hold from Buy, citing the impact of OpenAI’s optimization on future growth.

While Stifel’s checks indicated that Datadog was able to renew its contract with OpenAI for another year, “it is our understanding that OpenAI has taken several steps to meaningfully optimize its DDOG usage,” analysts wrote at the time. Stifel maintains a Hold rating on Datadog shares.

Write to Mackenzie Tatananni at mackenzie.tatananni@barrons.com