Datadog Inc. (DDOG) had a quarter most companies would kill for, but the market didn't seem to care. The stock sank more than 16% on Thursday even after the company blew past second-quarter expectations and raised its full-year guidance. So what gives?

The Numbers Were Great, So Why the Drop?

Let's start with the good stuff. Datadog reported adjusted earnings of 65 cents per share, beating the analyst consensus of 59 cents. Revenue jumped 36% year over year to $1.12 billion, also topping expectations of $1.08 billion.

GAAP net income climbed to $44.6 million, or 12 cents per diluted share, from just $2.6 million, or 1 cent per share, a year earlier. Non-GAAP operating income rose to $257 million from $164.1 million, while operating cash flow hit $315.9 million and free cash flow came in at $278.7 million.

Margins were a mixed bag: adjusted gross margin contracted by 100 basis points to 80%, but adjusted operating margin expanded by 300 basis points to 23%. The company ended the quarter with about $5 billion in cash, cash equivalents, and marketable securities.

So why the sell-off? Sometimes a stock runs up too far, too fast, and even great news isn't enough to keep the momentum going. Datadog shares had surged 30% in the past month, so some profit-taking was likely in play.

AI Is the Growth Engine

CEO Olivier Pomel said customers are expanding their use of artificial intelligence and increasingly relying on Datadog's platform to monitor, secure, and manage AI-enabled applications. The company also rolled out new AI products, including Bits Code, Bits Chat, and Bits Agent Builder, and acquired Adaptive ML to boost its AI research capabilities.

Business momentum remained strong. Customers generating at least $100,000 in annual recurring revenue grew about 23% year over year to roughly 4,720.

Guidance: Raised and Then Some

Datadog forecast third-quarter adjusted earnings of 63 to 65 cents per share on revenue of $1.135 billion to $1.145 billion, versus analyst estimates of 62 cents and $1.106 billion, respectively.

For the full year 2026, the company now expects adjusted earnings of $2.50 to $2.54 per share, up from its prior forecast of $2.36 to $2.44, and above the consensus of $2.42. Revenue is projected at $4.45 billion to $4.47 billion, up from the previous range of $4.30 billion to $4.34 billion and above the $4.35 billion analysts were looking for.

At the time of publication on Thursday, Datadog shares were trading down 16.76% at $235.72, according to market data.

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