During a rough session on Wall Street Wednesday, Datadog (NASDAQ:DDOG), which provides observability services for cloud-scale applications, incurred significant damage, shedding 10% before paring back some of the pain. In particular, DDOG stock responded poorly to downgraded expectations for Microsoft (NASDAQ:MSFT), which broadcasted pensiveness ahead of macroeconomic vagaries. For the midweek session, MSFT dipped 1%.
Initially, DDOG stock popped higher during yesterday’s after-hours session. At the time, Microsoft’s headline figures posted encouraging results. On the top line, the software and technology stalwart posted $52.7 billion in sales, just missing the consensus target of $52.97 billion. However, on the bottom line, Microsoft delivered earnings per share of $2.32, beating the consensus earnings per share (EPS) estimate of $2.30.
Unfortunately for DDOG stock, the devil was in the details. On one hand, revenue for Microsoft Cloud jumped 22% year-over-year to $27.1 billion. Although a positive for the broader cloud-computing industry, it also implies Microsoft represents the dominant player. Therefore, the total addressable market for the competition may shrink.
Drilling into the granularity, the market appears to have been spooked at certain line items. For instance, Microsoft’s Intelligent Cloud segment posted revenue of $21.51 billion. This tally barely beat analysts’ $21.44 billion consensus target. It also implied if a behemoth like Microsoft struggled, circumstances won’t be favorable for smaller outfits like Datadog.
DDOG Stock Slips Amid Pensive Guidance
Though corporate executives attempt to frame their enterprises in the best light possible, investors easily read between Microsoft’s lines. Indeed, the company’s revenue guidance for the current fiscal third quarter of between $50.5 billion to $51.5 billion said everything. Analysts polled by Refinitiv expected $52.43 billion.
“As I meet with customers and partners, a few things are increasingly clear. Just as we saw customers accelerate their digital spend during the pandemic, we are now seeing them optimize that spend,” said in part Microsoft CEO Satya Nadella during the earnings call. Nadella further stated that organizations exercised caution due to “macroeconomic uncertainty.”
Heaping on the anxieties for MSFT, DDOG stock and the broader tech ecosystem, Microsoft CFO Amy Hood noted business weakened in December, including in growth for Azure cloud services. Specifically, Hood cited weaker-than-expected performance in the U.S. market.
Worryingly, the latter point likely struck a nerve with those betting on DDOG stock. Although Datadog commands a global presence, the North American market represents the lion’s share of its sales. Therefore, the company needs the domestic sector to push higher, though Microsoft’s earnings results suggest the opposite dynamic is materializing.
Why It Matters
Earlier today, the New York Times noted the “drumbeat of layoffs” in Silicon Valley rang out, largely due to the pandemic’s disruption. Conspicuously, Microsoft added its voice to the cacophony, announcing last week that it will lay off 10,000 workers. The pink slip distribution only serves to underscore the challenges for tech enterprises, boding poorly for DDOG stock.
Still, at this moment, Datadog commands a “strong buy” consensus view. As well, analysts’ average price target for DDOG stock stands at $102.80, implying more than 46% upside potential.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
