By Eric J. Savitz
Datadog shares are heading higher in response to an upbeat call about the provider of cloud observability and security software by Wells Fargo analyst Andrew Nowinski.
The analyst thinks a recent focus on costs that has pressured providers of cloud computing software in recent quarters has run its course. "We believe cloud cost optimization is coming to an end, with customers now focusing on modernizing their infrastructure," Nowinski said in a research note.
Management hasn't factored any related improvement in consumption into their financial forecasts for 2024, he said.
Nowinski raised his rating on Datadog to Overweight from Equal Weight, with a price target of $150, up from $130. He also raised his estimates for the company for both this year and next year.
Datadog shares were 3.9% higher at $126.85 on Tuesday morning.
He thinks that the optimization spending headwind the company has faced for more than a year now can convert to a tailwind, potentially starting with its March quarter results, scheduled for May 7.
At the same time, he said, Datadog is winning larger deals as customers move to consolidate their IT spending with a smaller number of vendors.
"Datadog may not have the best products in a single category of the observability market, but they have the most comprehensive platform," he wrote. The analyst also thinks the company has an opportunity to steal away some customers from rival Splunk, which was recently acquired by Cisco Systems.
Not least, the analyst thinks the company will get a bump from artificial intelligence-related workloads. That could account for more than 10% of annual recurring revenue in 2025 "as organizations continue to roll out Gen AI workloads and models," he said.
Write to Eric J. Savitz at eric.savitz@barrons.com
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April 23, 2024 11:58 ET (15:58 GMT)
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