3 Reasons to Stay Away From Datadog Stock Despite Q4 Earnings Beat

Datadog DDOG reported fourth-quarter 2025 results, wherein both revenues and earnings exceeded the Zacks Consensus Estimate. DDOG’s fourth-quarter revenues came in at $953.19 million, representing 29% year-over-year growth and surpassing the consensus estimate by 4.22%. Adjusted earnings per share of 59 cents also topped the consensus estimate by 7.27%.

The company posted record bookings of $1.63 billion, up 37% annually. While these headline numbers certainly look impressive, a closer examination reveals several concerns that should give investors pause before adding this stock to their portfolios in 2026.

Conservative Forward Guidance Signals Growth Deceleration

Despite the strong fourth-quarter beat, Datadog’s forward guidance paints a decidedly more cautious picture. Management guided for first-quarter 2026 revenues of $951 million to $961 million, implying 25% to 26% year-over-year growth, while full-year 2026 revenue guidance of $4.06 billion to $4.10 billion points to only 18% to 20% growth — a notable deceleration from the 28% full-year growth achieved in 2025.

The Zacks Consensus Estimate for DDOG’s 2026 earnings is pegged at $2.27 per share, unchanged over the past 30 days. The earnings figure suggests a 10.73% increase year over year.

The company projected non-GAAP operating income of $840 million to $880 million and non-GAAP earnings per share in the range of $2.08 to $2.16 for 2026. Capital expenditures and capitalized software are expected to consume 4% to 5% of revenues, while net interest and other income is expected to be approximately $140 million. Management explicitly noted that its full-year model assumes the core business, excluding its largest customer, grows at least 20%, with a conservative assumption applied for that top account. This measured outlook, following a blowout quarter, suggests that management sees headwinds ahead that investors should not dismiss lightly.

Datadog, Inc. Price and Consensus

Datadog, Inc. price-consensus-chart | Datadog, Inc. Quote

Rising Operating Expenses and Margin Pressures

Datadog continues to invest aggressively in research and development and go-to-market initiatives, which may pressure operating margins in the near term. While the company reported a non-GAAP operating margin of approximately 23.4% and free cash flow of $291 million in the fourth quarter, full-year net income actually declined to $107.74 million despite revenue growth.

The company launched more than 400 new features and capabilities in 2025, including its Bits AI SRE Agent, Storage Management, Feature Flags, and Data Observability — all of which require sustained investment to gain traction. As Datadog expands its product portfolio into areas like AI observability, cloud security, and service management, the risk of spreading resources too thin while competing against well-capitalized rivals increases considerably.

Stretched Valuation and Intensifying Competitive Landscape

Datadog shares have declined 31.5% in the past three months, underperforming the Zacks Computer and Technology sector’s return of 2.2% and Zacks Internet Software industry’s decline of 7.1%.

DDOG Underperforms Sector in 3 Months

DDOG is operating in a more competitive observability landscape as established enterprise vendors intensify their push into application performance monitoring and log analytics. IBM IBM expands its observability suite through Instana, making IBM a formidable threat, while IBM’s hybrid cloud push intensifies pressure. Dynatrace DT remains a close rival, as Dynatrace’s AI-powered platform and its government presence sharpen competition. Cisco Systems CSCO leverages Splunk, positioning Cisco Systems as a consolidation force, while Cisco Systems’ integrated offerings challenge Datadog.

Currently, Datadog’s forward 12-month P/S ratio hovers around 10.75x, well above the industry’s 4.02x, suggesting anticipated growth is priced in. The Value Score of F reinforces this stretched valuation profile.

DDOG Trades At a Premium P/S Valuation

Conclusion

While Datadog’s fourth-quarter earnings beat certainly grabbed headlines, decelerating growth guidance, rising expenses and a stretched valuation collectively paint a troubling picture. Investors would be wise to exercise caution and consider staying on the sidelines until these fundamental concerns show meaningful signs of resolution.

DDOG currently carries a Zacks Rank #4 (Sell). 

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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