Cloud stocks are slipping on Tuesday, after one of the more prominent ones, Datadog, lowered its full-year revenue guidance as organizations remain engaged in cost-saving exercises.
One cloud-oriented exchange-traded fund, the WisdomTree Cloud Computing Fund, tumbled 3% for the day, on pace for its fifth day of declines in the past six trading sessions.
Many cloud-computing companies enjoyed higher demand after Covid prompted companies, governments and schools to switch on more cloud services as employees worked from home. Then inflation hit, central bankers raised interest rates, and investors began selling holdings in fast-growing cloud stocks and rotating into safer investments that could more consistently offer returns.
Plus, some parts of the economy, such as real estate, have started to flag because of higher rates, leading management teams to look for places to save money on cloud infrastructure and other technology.
Executives at many cloud companies responded by reducing overhead, sometimes in the form of layoffs. In the past several months, the rise of generative artificial intelligence services such as startup OpenAI’s ChatGPT chatbot have made investors more interested in adopting similar technologies and additional tools to help with the shift. Cloud stocks began to rebound, but many, including Datadog, have yet to trade above their record highs from 2021.
Now some of the fastest-growing companies are no longer looking so hot.
Datadog’s revenue grew almost 83% year over year in the first quarter of 2022. Early on Tuesday Datadog said it expects full-year revenue to come in between $2.05 billion and $2.06 billion, down from the range of $2.08 billion to $2.10 billion that it provided in May. That implies Datadog sees fourth-quarter revenue growing just 15%, compared with a forecast of almost 23% before. Analysts polled by Refinitiv had expected $2.081 billion in revenue for the full year.
“We saw usage growth for existing customers that was a bit lower than it had been in previous quarters,” Olivier Pomel, Datadog’s cofounder and CEO, said on a conference call with analysts. “We continue to see customers larger spending customers scrutinize costs.”
Datadog’s guidance of $521 million to $525 million in revenue for the third quarter underwhelmed analysts. They had expected $533 million, according to Refinitiv. Then again, Pomel said during the call that he and his colleagues have incorporated conservatism into their outlook.
“For a company where growth has been one aspect making it so attractive, it is probably not surprising that the stock is down sharply in the pre-market,” Bernstein Research analysts led by Peter Weed, with the equivalent of a buy rating on Datadog stock, wrote in a note distributed to clients. They haven’t soured on the stock altogether, though. They analysts wrote that they expect growth to return as enterprise spending budgets recover and venture capitalists start pouring large pools of money into startups again.
Datadog shares, which debuted on the Nasdaq in 2019, were on track for their sharpest single-day pullback since March 2020, as Covid emerged in the U.S. They were down as much as 21% on Tuesday.
Most stocks in WisdomTree’s cloud fund were down on Tuesday. But it wasn’t all Datadog’s fault.
Late on Monday cloud communications software maker RingCentral said Hewlett Packard Enterprise’s finance chief, Tarek Robbiati, will replace co-founder Vlad Shmunis as CEO later this month. Shares of RingCentral were down as much as 18%.
“Sales cycles remain elevated versus last year, and customer buying decisions continue to go through additional layers of approval,” RingCentral’s chief financial officer, Sonalee Parekh, said on a conference call with analysts. “We are also seeing less upsell within our existing base as customers have slowed hiring and rationalized their employee counts.”
Like Datadog, Everbridge, whose software helps companies respond to emergencies, lowered its growth expectations for the full year on Tuesday. It now sees a larger loss than it had called for three months ago.
A weaker economy has led to “slower sales of large deals,” finance chief Patrick Brickley said on a conference call with analysts. Shares had slid almost 24% when the stock hit a session low of $22.17 per share.