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Datadog's Lower 2023 Revenue Estimates Lead to Cloud Companies' Struggles

Lanon Wee

Cloud stocks are seeing a sharp decline as companies persist in examining their technology costs.Datadog, which made its initial public offering in 2019, is heading towards its most drastic decrease in value since the pandemic hit the US in March 2020. On Tuesday, cloud stocks were dealt a blow, after Datadog, one of the more prominent companies in the sector, reduced its full-year revenue expectations due to cost-cutting measures being implemented by many organizations. This caused the WisdomTree Cloud Computing Fund, an exchange-traded fund, to decline 3% and embark on its fifth consecutive trading day of losses over the prior six.The shift to cloud services as a result of the Covid pandemic had initially boosted demand for these companies. However, when inflation hit, as well as central bankers raising interest rates, investors began to rotate their capital into safer investments that could more reliably produce returns. Additionally, some parts of the economy, such as real estate, have recently become sluggish, with management teams turning to cloud infrastructure and other technology to save funds.Leaders from many cloud-computing firms responded by cutting back their overhead, often in the form of layoffs. Additionally, the emergence of generative artificial intelligence services such as OpenAI's ChatGPT chatbot has created interest in leveraging such tools to assist during the transition. Cloud stocks saw some recovery, though many are still trading beneath their 2021 peak. Furthermore, Datadog provided a forecast of third-quarter revenue that fell short of analyst expectations.CEO Olivier Pomel commented that they witnessed reduced spending amongst their customers during the conference call with analysts. Bernstein Research analysts, who have a favorable outlook on the stock, stated that growth should come back once enterprise spending budgets recover and venture capitalists resume investing large sums of money in startups.Those same analysts observed that the stock experienced its most severe pullback since March 2020. Other cloud-related stocks, such as RingCentral were also affected, after announcing the departure of their co-founder and appointing a new CEO. RingCentral shares ended Tuesday's trading session with a decrease of 18%. Everbridge, whose software supports businesses managing crises, also reduced its growth projections for the full year, while concurrently posting a loss for the period.Dom, Enfusion, Monday.com, Smartsheet, Snowflake and Twilio were all down at least 5% on Tuesday as well.

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