Written by: Rita

Datadog delivered a remarkable earnings report in the second quarter of 2026: revenue grew 35.6% year-over-year, accelerating by 340 basis points quarter-over-quarter, marking the strongest growth since 2022. The company's revenue for the quarter exceeded guidance by $46 million and raised the midpoint of its full-year guidance by more than three times.

Behind this "better-than-expected" number, Bernstein sees the peak of growth.

The report's title directly presents the judgment: Q2 growth has peaked, and H2 will see a mild deceleration. Bernstein expects that growth in the second half will slow by about 200 basis points to around 33%. The largest AI client, OpenAI, lowered its spending level when renewing its contract in early Q3, and AWS web traffic metrics also suggest a potential "soft patch" in Q4. Growth stock investors' expectations for continued acceleration may face testing in the coming quarters.

The stronger the Q2 data, the clearer the deceleration signal

In the second quarter of 2026, Datadog's revenue reached $1.121 billion, a year-over-year increase of 35.6%.

Quarter-over-quarter acceleration of 340 basis points. This is the strongest growth since 2022. The overall beat was $46 million, and the midpoint of the full-year guidance was raised more than three times. Non-AI business revenue grew over 20% year-over-year, and the contribution from AI native customers continued to expand, jointly driving the acceleration of growth.

Bernstein noted that this "strength" is precisely a peak signal. The implied growth rate for the second half in the company's guidance is already slowing. Even if management continues to "beat and raise" at recent peak levels in subsequent quarters, growth can only stabilize at current levels and cannot go any higher. Bernstein expects growth in the second half to fall back to around 33%, about 200 basis points lower than Q2.

The turning point of growth has already appeared. The question the market needs to answer is: is this a mild deceleration, or the beginning of a trend slowdown?

Largest AI client reduces spending, NRR will see a one-time drop

The most direct signal of slowing growth comes from the largest AI client.

Bernstein believes that this client is OpenAI. OpenAI renewed a nine-figure contract in early Q3, but the spending level was lower than before. Bernstein lowered this client's annual contract value (ACV) to about $115 million, slightly up from around $100 million in the previous model, but actual usage saw a decline at the beginning of Q3. Management confirmed in the earnings call that they have "fully de-risked" this client in the Q4 guidance. The Q4 guidance only includes the minimum spending amount as stipulated in the client's contract, without assuming any excess spending.

This means that the net retention rate (NRR) will see a one-time drop in Q3. Bernstein estimates that the NRR has continued to improve since bottoming out in Q2 2023, but OpenAI's reduced spending will interrupt this trend.

The second largest AI client (Believed by Bernstein to be Anthropic) is expected to grow 10% to 15% quarter-over-quarter in Q3 and Q4, with no significant model releases recently, maintaining growth in a steady range. Other AI clients have growth rates far exceeding 100%, but the base is small and cannot compensate for the shortfall caused by the reduction from top clients.

AWS web metrics suggest a "soft patch" in Q4

Bernstein used AWS SSO web traffic data as a leading indicator of non-AI customer demand.

The web traffic at the end of Q2 was relatively weak, providing a lower starting point for Q3. If the weekly trend in Q3 continues the pattern of 2025, year-over-year growth will face pressure. However, Bernstein also pointed out that if the quarter-over-quarter trend in Q3 is strong enough, this pressure may just be a "soft patch" for one quarter, with Q1 2027 returning to recent trends.

Bernstein explicitly defined this impact in the report as a one-time issue and expected that net new ARR growth will rebound to low to mid-double digits in 2027 to 2028.

Possible softness in Q4 is supported by data, but Bernstein does not consider it structural.

Valuation and overcrowding are the real risks

Bernstein maintains Datadog's "in line with the market" rating, with a target price of $237, representing about 16% downside from the current stock price of $283.

The report emphasizes that the rating is unrelated to business fundamentals. Bernstein stressed in the report that the "in line with the market" rating is not related to business strength; the current valuation and deep overcrowding are the real issues. Bernstein is concerned that some investors expect growth to continue accelerating, and when growth stabilizes or even declines in the coming quarters, the market will feel disappointed, and crowded long positions will loosen accordingly.

The current stock price corresponds to an adjusted P/E ratio of 105 times for 2026 and 82 times for 2027, with an enterprise value/sales ratio of about 17.5 times. On a stock where growth is expected to decrease from 35% to 33%, these numbers demand that expectations cannot weaken at all.

The long-term logic of integrating observability with security platforms, AI-driven security analysis, and BYOC architecture's appeal to large-scale customers remains valid. Bernstein mentioned in the report that Datadog is supporting customers with excessive log volumes, high costs, or security sensitivities through the BYOC (Bring Your Own Cloud) architecture, providing analytics and control capabilities without centralizing data in the Datadog SaaS environment, which management believes is a significant opportunity to win large-scale deployments. The proportion of training workloads is also increasing, with new use cases for model training added among AI clients in recent quarters, including inference and production applications. However, these long-term logical aspects have already been fully or even excessively priced into the current valuation.

Datadog is a good company, but its stock price has already anticipated all the good news for the next 12 to 18 months.

Disclaimer: This article is a compilation and interpretation of third-party brokerage research reports (Bernstein, August 6, 2026) by Chaoxiang Research, combined with the organization of publicly available market information. The ratings, target prices, earnings forecasts, and relevant judgments cited in the text are the views of the analysts of that brokerage and only represent the stance of their respective institution, not the views of Chaoxiang Research, and do not constitute any investment advice. The market has risks, and decisions need to be made independently. This article should not be used as a basis for buying or selling any securities.