Datadog Inc. shares shrugged off a Wells Fargo downgrade Friday as Wall Street saw positive read-throughs for the observability company in Amazon.com Inc.’s latest cloud-computing results.
Amazon
AMZN,
late Thursday offered what many saw as upbeat forward-looking commentary on its AWS cloud-computing business, as management acknowledged that customers are still “optimizing” their spending, or looking to get the most for their money, but that those optimization trends are “attenuating.”
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The third-quarter performance of AWS was “roughly in line” with expectations, noted TD Cowen analyst Andrew Sherman, while results from Microsoft Corp.’s
MSFT,
Azure cloud-computing business came in above expectations earlier in the week.
Read: Microsoft ‘has taken the AI mantel from Google’—and now it’s coming for Amazon in the cloud
“These strong hyperscaler results are a positive read-through for DDOG which increases our conviction heading into the print,” Sherman wrote, while keeping an outperform rating and $120 target on the stock. “We think consensus has shifted to the short side, which improves the setup in our view, [especially] considering the lack of a rally off of Azure/AWS.”
Datadog shares
DDOG,
gained just over 1% Monday, while Amazon shares advanced nearly
The “vast majority” of Datadog customers are running on AWS, Sherman continued, and Datadog’s growth “as a multiplier of AWS growth has been 2.1x over the last two quarters.”
“Taking AWS growth of 12.3% in 3Q, this suggests ~26% growth for DDOG, well above the guide high-end of 20%,” he wrote.
Bernstein analyst Peter Weed was also struck by Datadog’s muted Friday performance, which contrasted with the sizable move higher in Amazon shares.
“What gives? We worry many investors still believe that Datadog disconnected from AWS last quarter,” said Weed, who has an outperform rating and $133 target price on the stock.
But he doesn’t think that disconnect actually happened, and he wrote that “worries about Datadog weakness (that would cause a disconnect from AWS) are not incrementally material in Q3.”
The third-quarter results and forward commentary from AWS suggest “building momentum” that support his model for Datadog.
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But Andrew Nowinski of Wells Fargo cut his rating on Datadog’s stock to equal weight from overweight Friday morning, warning of a “too aggressive” setup looking into fiscal 2024.
“We believe the cost optimization trends that pressured revenue growth over the last year continue to persist, and will likely continue into 2024,” he wrote. “Recent comments from Google and Microsoft align with this view. While one can argue the workloads that Datadog is monitoring are mission critical and therefore not cost optimized, we believe cost optimization slows the migration of new applications to the cloud, which in turn impacts the expansion rates of Datadog.”