The cloud stock market took a hit on Tuesday with several prominent companies experiencing declines. This comes after Datadog, a leading player in the cloud industry, lowered its full-year revenue guidance due to cost-saving exercises by organizations. The WisdomTree Cloud Computing Fund, an exchange-traded fund focused on cloud companies, also suffered, marking its fifth day of declines in the past six trading sessions. This downward trend in cloud stocks can be attributed to various factors, including inflation, rising interest rates, and investors seeking safer investments.
The Impact of the Pandemic and Inflation
When the COVID-19 pandemic hit, there was an increased demand for cloud services as companies, governments, and schools transitioned to remote work and learning. Cloud-computing companies experienced a surge in business during this time. However, the situation changed when inflation started to rise, resulting in central bankers raising interest rates. This led to investors selling off their holdings in fast-growing cloud stocks and moving towards safer investments that could offer more consistent returns. The effects of inflation were felt in various sectors, such as real estate, which prompted management teams to find ways to save money on cloud infrastructure and other technology.
In response to the changing economic landscape, executives at many cloud companies decided to reduce overhead costs. This often involved measures such as layoffs. The rise of generative artificial intelligence services, such as OpenAI’s ChatGPT chatbot, also caught the attention of investors. As a result, cloud stocks started to rebound. However, despite the overall recovery, many companies, including Datadog, have not yet reached their record highs from 2021, indicating that some of the fastest-growing companies in the cloud industry are no longer as attractive to investors.
Datadog’s Revenue Guidance and Analyst Reactions
Datadog, a provider of cloud-based infrastructure monitoring, saw its revenue grow nearly 83% year over year in the first quarter of 2022. However, the company recently revised its full-year revenue guidance downwards. It now expects revenue to be between $2.05 billion and $2.06 billion, compared to the previously projected range of $2.08 billion to $2.10 billion. This implies that Datadog’s growth in the fourth quarter will only be around 15%, much lower than the previous estimate of 23%. Analysts had anticipated $2.081 billion in revenue for the full year, according to Refinitiv.
The lower revenue guidance from Datadog was influenced by slower usage growth from existing customers, as well as larger spending customers scrutinizing costs. The company’s guidance for the third quarter, with revenue projected to be between $521 million and $525 million, fell below analysts’ expectations of $533 million. However, Datadog’s management team stated that they had incorporated conservatism into their outlook.
Bernstein Research analysts, who have a buy rating on Datadog stock, acknowledged that the company’s significant growth had made it attractive to investors. However, they noted that the stock’s sharp decline in the pre-market was not surprising given the revised guidance. The analysts expressed optimism that growth would return as enterprise spending budgets recover and venture capitalists resume investing heavily in startups.
The impact of the cloud stock decline was not limited to Datadog alone. RingCentral, a cloud communications software maker, announced a change in CEO, which led to a significant drop in its stock price. Everbridge, a company specializing in software for emergency response, also lowered its growth expectations for the full year and projected a larger loss than previously anticipated due to a weaker economy.
Other cloud companies, including Domo, Enfusion, Monday.com, Smartsheet, Snowflake, and Twilio, also experienced declines in Tuesday’s trading session. These trends indicate that the challenges faced by the cloud stock market extend beyond individual companies and may be indicative of a broader shift in investor sentiment towards the industry.
The cloud stock market is currently facing challenges as investors seek safer investments amid rising inflation and interest rates. Companies like Datadog, which saw impressive growth in the past, have had to revise their revenue guidance downwards due to cost-saving measures being implemented by organizations. While some cloud stocks have started to rebound from previous declines, they have yet to reach their record highs from 2021. This suggests that the allure of the cloud industry for investors may be waning, at least for the time being. Economic conditions, enterprise spending budgets, and the interest of venture capitalists will play crucial roles in determining the future growth and success of cloud companies.
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