Bernstein: Datadog (DDOG.US) and Cloudflare (NET.US) stock prices are oversold, and strong AI business growth is expected to drive Q3 results to exceed expectations

The Zhitong Finance App learned that Wall Street research firm Bernstein released a research report on Monday indicating that the large-scale sell-off in cloud infrastructure software stocks last Friday may have overreacted. Although the latest results of Amazon Cloud Services (AWS) and Twilio (TWLO.US) have raised concerns about a slowdown in demand for cloud computing, Bernstein believes that Datadog (DDOG.US) and Cloudflare (NET.US) are expected to capitalize on the rapid growth of artificial intelligence (AI) related businesses and show better performance than the overall industry in the upcoming third-quarter earnings report.

On Friday, US software stocks generally declined. Among them, cloud infrastructure software companies that charge per usage declined particularly significantly. Most stocks fell 5% to 10% or more. Cloudflare shares fell 9.5%, while Datadog fell 11.5%.

Bernstein analyst Peter Weed believes that this round of sell-off was largely affected by the performance of AWS and Twilio. Twilio's organic revenue growth rate has slowed year over year, and although AWS's revenue growth has accelerated, the acceleration was lower than Wall Street's expectations. Furthermore, the two companies' statements on business prospects for the fourth quarter fell short of market expectations, further exacerbating investors' concerns.

Bernstein pointed out that the cloud computing industry is indeed facing some demand pressure recently. Previously, there was a surge in the use of AI programming tools, which once drove a rapid increase in demand for cloud services, but as related demand falls from its peak, some companies' revenue growth in the fourth quarter may temporarily slow down.

However, the bank believes that the situation of Datadog and Cloudflare may be different. Although both companies' traditional customer businesses are also under pressure to slow growth, strong growth in AI-related businesses is expected to offset this impact, making them perform better than other cloud infrastructure software companies.

For Datadog, Bernstein is particularly optimistic about the growth opportunities brought by its AI-native customers. The bank estimates that the new Annualized Recurring Revenue (ARR) added to Datadog's AI-native customer base in the third quarter may be about $200 million higher than previously anticipated. This means that related businesses are expected to bring in additional revenue of around $50 million, but since Datadog uses a pay-as-you-go model, there is still uncertainty as to whether this revenue will be confirmed in the third or fourth quarter.

Bernstein's current forecast model mainly includes this portion of growth in the third quarter, which means that Datadog's revenue for the quarter may be about 90 million US dollars higher than the company's previous guidance, exceeding expectations by about twice the highest level in history.

However, analysts also acknowledge that this forecast may be too optimistic. Even if confirmation of some revenue is delayed until the fourth quarter, it may push the company to give strong performance guidance for the next quarter.

Bernstein predicts that Datadog's fourth-quarter revenue growth rate is expected to reach about 40% year-on-year, driven by AI demand, although the growth rate of its traditional customer business may slow to around 25% from about 28% in the third quarter.

Cloudflare is also expected to benefit from the rapid growth in demand for AI application development.

Bernstein estimates that the annualized recurring revenue of Workers, a developer platform under Cloudflare, may have reached about $500 million in the third quarter, an increase of about two times that of the fourth quarter of 2025, that is, the scale has increased to three times that time.

The bank believes that AI programming agents are driving enterprises and developers to adopt new application development models, causing demand for cloud services that do not require self-management servers to grow rapidly.

Currently, Cloudflare and Vercel are seen by Bernstein as the two main competitors in this market. Relevant data shows that since this year, the scale of applications deployed through this type of technology has about tripled, and the growth trend at the beginning of the fourth quarter shows that related demand is expected to increase further by about 25% month-on-month.

Bernstein predicts that this increase may drive Cloudflare's third-quarter revenue growth rate nearly 2 percentage points faster than the previous quarter, and enable it to achieve the biggest performance since this year, exceeding expectations.

Although the slowdown in demand for traditional cloud services may cause Cloudflare's fourth-quarter revenue growth to decline year-on-year, the continued expansion of the Workers business is expected to support growth in 2027. Bernstein believes that the company's revenue growth rate is expected to reach more than 40% year-on-year in 2027.

Furthermore, the bank's preliminary network traffic data shows that demand for cloud services has rebounded in October, and the growth trend is similar to the strong performance in the fourth quarter of 2025. This means that the recent demand pressure on the industry may only be temporary, and the two companies are expected to give a more optimistic 2027 performance outlook in the future.

Despite optimism about the growth prospects of the two companies, Bernstein still has differences in investment ratings. The bank maintained Datadog's “outperforming the market” rating with a target price of $350; it maintained Cloudflare's “same as the market” rating, with a target price of $245, with no adjustments. Based on the closing price on October 30, Datadog reported $235.27, and Bernstein's target price corresponds to an increase of about 48.8%; Cloudflare reports $280.70, and its target price is about 12.7% lower than the current stock price.

Bernstein pointed out that although the combined growth and profitability performance of the two companies is likely to be close, Cloudflare's valuation is significantly higher than Datadog, so the latter is more attractive at current price levels.

However, the bank also believes that Cloudflare lacks obvious catalytic factors to lower its valuation in the short term. If the Workers business continues to grow rapidly and drive the company's revenue growth rate to more than 40% in 2027, its stock price may still be supported.