Shares of Datadog (DDOG -4.11%) fell on Tuesday, down as a lot as 6.3%, earlier than recovering barely to a 4.1% decline as of 12:51 p.m. ET.
Right this moment’s sell-off was brought on by a adverse analyst be aware, which posited Datadog’s progress price might take a giant step down this 12 months as a result of lack of its largest buyer, AI disruptor OpenAI, which is reportedly constructing its personal observability software program instruments in-house.
OpenAI might look to chop out Datadog
For the reason that COVID-19 pandemic, Datadog has emerged as a disruptive winner in log administration and observability software program, which displays the well being and safety of IT infrastructure. Datadog’s cloud-first method has discovered favor particularly with high-growth tech corporations, resulting in a robust near-50% common progress price over the previous 5 years.
However as we speak, sell-side analysts at Guggenheim downgraded Datadog’s inventory from “impartial” to “promote,” whereas placing a $105 worth goal on the inventory. That is considerably beneath the $146 worth at which the inventory trades as we speak, even after Tuesday’s adverse efficiency.
The explanation for the downgrade is Guggenheim’s take that Datadog will lose its largest buyer in OpenAI, the corporate behind ChatGPT, which is reportedly constructing its personal in-house log administration metrics software program.
The analysts see this loss leading to a gap of greater than $150 million in income, which might end in a major deceleration later this 12 months. Guggenheim sees income progress stepping down from the present mid-20% progress price to 17% within the fourth quarter of this 12 months and 15% progress in 2026.
Picture supply: Getty Photographs.
The downgrade is worrying not just for Datadog
Current information experiences have highlighted that OpenAI has broad ambitions to take its market-leading massive language AI fashions into quite a few downstream purposes, from enterprise software program to even its personal {hardware} units. Since massive language fashions are actually pretty adept at writing code, might OpenAI additionally displace its personal software program suppliers?
To be truthful, OpenAI’s AI infrastructure doubtless processes orders of magnitude extra knowledge than the everyday Datadog buyer, which correlates to huge quantities of cash at present going to Datadog. That might make it financially sound for OpenAI to construct its personal inside software program, however not the remainder of Datadog’s buyer base.
But whereas this may not be the case for each firm, it does elevate the potential of OpenAI and different AI-first start-ups changing into aggressive threats to current software program leaders, as these new start-ups goal to go “downstream” into customer-facing purposes.
Billy Duberstein and/or his shoppers haven’t any place in any of the shares talked about. The Motley Idiot has positions in and recommends Datadog. The Motley Idiot has a disclosure coverage.
