Datadog's Q4 Earnings Beat Masks Persistent Risks Highlighted in DeepValue Analysis

What happened

Datadog reported Q4 2025 earnings and revenues that surpassed estimates, with year-over-year growth in customer counts, ARR, and cash flow. This positive headline comes against a backdrop of market skepticism detailed in the DeepValue report, which flags AI-customer optimization and renewal volatility as material threats to durable growth. Despite the beat, the report underscores ongoing gross margin pressure, with margins slipping from 81% to 80% in recent quarters due to rising cloud costs, and a steep valuation (P/E 349x) that offers minimal downside cushion. The earnings performance may temporarily ease concerns, but it does not fundamentally address the core risks—like dollar-based net retention stability and competitive pricing pressures—that drove the WAIT rating. Investors should remain vigilant, as the report emphasizes that confirmation of these metrics over the next few quarters is critical for any re-rating.

Implication

The earnings beat provides a short-term sentiment boost but does not alter the high-risk profile, given Datadog's valuation leaves no margin for error if usage optimization accelerates. Long-term, the implication is that growth remains heavily reliant on existing customer expansion, with 75-80% of incremental revenue from this source, making the business vulnerable to renewal discounts and AI-customer volatility. For portfolio positioning, this news reinforces the need to wait for clearer signals on dollar-based net retention holding near 120% and gross margin stabilizing around 80-81% before considering entry. Additionally, insider trading patterns, including clustered sales by executives, add to the uncertainty and suggest potential overvaluation at current levels. Ultimately, investors must monitor the next 1-2 quarters for management commentary on the largest AI-customer renewal and any margin deterioration to avoid capital impairment in a scenario where fundamentals deteriorate.

Thesis delta

The earnings beat does not shift the core thesis, which remains centered on waiting for confirmation that dollar-based net retention stays near 120% and gross margin holds ~80-81% amid optimization risks. If Q4 details reveal stable or improving trends in these areas, it could support the base case scenario, but without such data, the WAIT rating and its associated risks—like AI concentration and competitive pressure—remain unchanged.