On Thursday, Morgan Stanley (NYSE:MS) adjusted its stance on Datadog (NASDAQ:DDOG) shares, downgrading the stock from Overweight to Equal-weight, while maintaining a price target of $143.00. The firm's analysts cited a more balanced risk-reward scenario as the reason for the change in rating, noting that the company's shares are currently trading near the set target.
Datadog has been recognized for its transition from a system of alerting to a system of action, expanding into cloud security and cloud service management. This evolution represents a significant market opportunity, potentially worth over $100 billion by 2027. Despite this promising outlook, Morgan Stanley believes that the immediate future presents a more even mix of potential upsides and risks.
The firm highlighted several factors informing their decision. These include the possibility that Datadog's initial FY25 revenue growth forecast may be slightly below the consensus. Additionally, there may be a temporary deceleration in revenue growth to the low 20% range as Datadog's AI-native customers start to optimize their spending. Furthermore, the valuation, based on approximately 13 times CY26 Sales and about 43 times CY26 Free Cash Flow, is deemed fair given the low 20% revenue growth and low-20% Free Cash Flow growth projections through CY26.
Morgan Stanley's assessment reflects a cautious optimism about Datadog's long-term potential, tempered by a near-term view that anticipates a more moderate growth trajectory and a fair current valuation. The firm's analysts maintain their price target, suggesting they still see value in the stock at the current levels but advise a more neutral position moving forward.
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