The most consequential disclosure in enterprise software this month was a contract renewal. On its 6 August call, Datadog — which sells cloud monitoring software that tracks whether a customer's applications, servers and logs are behaving, and bills by volume consumed — told investors that its largest artificial-intelligence customer, a nine-figure account running 17 of its products, had signed again at reduced usage.

Nothing was lost. The customer stayed, on the same platform, using the same tools. It simply decided to send fewer bytes. Under consumption pricing that is indistinguishable from a cancellation for the quarter in question: Datadog cut third-quarter revenue guidance to $1.135–1.145bn, implying 28–29% growth against the 35.6% it had just delivered. The shares fell about 19% that day despite a revenue beat and a raised full-year outlook.

The quarter underneath

Strip that account out and Datadog's operating record is the strongest it has been in two years. Revenue of $1.121bn grew 35.6%, a fourth consecutive acceleration from 28.4% three quarters earlier. Non-artificial-intelligence revenue — the ordinary business of watching ordinary software — reached high-20s growth, up from 18% a year ago. Customers spending more than $100,000 a year rose to 4,720 from 3,850 and now supply 91% of annual recurring revenue. Net revenue retention held in the low 120s.

Profitability turned as well. GAAP operating margin reached +0.49% against −4.13% a year earlier, free cash flow was $279m, and the diluted share count rose just 1.9% — unusually little dilution for a company of this compensation profile. The one genuine deterioration is gross margin, down 180 basis points to 78.6% from 80.4% two quarters ago, as Datadog's own AI features push inference costs into cost of revenue.

The moat argument is unchanged: when Datadog is unavailable, engineering teams lose visibility into every production system at once, and more than a thousand integrations across twenty-odd products make it painful to unpick. Gartner's most recent observability ranking places it among eight leaders alongside Dynatrace, Splunk and Elastic, and the category is consolidating — Palo Alto Networks bought Chronosphere for $3.35bn in January. But a moat governs whether a customer leaves, not how much it spends. Management said outright that priorities have shifted from validating AI to optimizing its cost.

What the price already assumed

Datadog costs 27.3 times trailing gross profit today, against 27.1 times in May and 15.4 times in February. The re-rating happened before this quarter, not because of it; the past three months added nothing to the multiple even as gross profit grew 33%. That figure still sits far above Dynatrace at roughly 8.4 times and Elastic at 6.8 times. Trailing free cash flow yield is 1.38%, so cash generation is not anchoring anything. Datadog's trend has been intact since 21 May — its 50-day average above its 200-day on every session since, including through the 20% fall.

Snowflake is the opposite arrangement. Its cloud data warehouse, where customers pay for compute consumed rather than seats occupied, delivered product revenue of $1.33bn, up 34%, with remaining performance obligations of $9.21bn, up 38%, and net revenue retention of 126% in its April quarter, and lifted full-year product revenue guidance to $5.84bn. That was 27 May. Since then it has published nothing, and price per dollar of trailing gross profit has gone from 18.0 times to 32.9 times — an 83% expansion against trailing gross profit growth of 7.4%. Its AI evidence remains account counts, not dollars: Cortex across 9,100-plus accounts, no quantified revenue line. It is still GAAP loss-making, at −$295.6m last quarter, with gross margin flat at 66.6%. Databricks, its closest private rival, reached roughly $6.9bn annualized revenue by mid-2026. Snowflake reports its July quarter on 2 September, and will face the same optimization question Datadog just answered badly.

The company keeping this group afloat isn't an AI story

Elastic, which sells the search and logging stack behind Elasticsearch, rose 46.6% over thirty days with no earnings report at all — six straight advancing sessions in mid-August on a security-platform upgrade and price-target raises. That is roughly half the group's entire monthly gain, from its cheapest and slowest-growing member: revenue grew 16.0% last quarter, decelerating.

Strategy, the bitcoin treasury that still carries an analytics label, contributed the rest — and only in the final three sessions, rising 12.7%, 7.8% and 7.0% from 19 to 21 August as bitcoin cleared $68,000 on crypto-policy optimism. Its software arm booked $122.4m of revenue last quarter, about 0.3% of market value, while the GAAP loss was $8.22bn on bitcoin marks. It trades at 0.90 times book, with third-party trackers putting its premium to bitcoin holdings at 0.68–0.71 times in early August against roughly 3.4 times in November 2024, and an average coin cost near $75,419 versus spot around $73,755. A sixth member, Clearwater Analytics, stopped trading entirely: Permira and Warburg Pincus took it private in June at $24.55 a share.

One further point about the rally's cause: this month's software strength is being attributed to second-quarter earnings beats rather than to the interest-rate path, with Federal Reserve officials floating increases rather than cuts. The bid is for results. Datadog produced them and was sold anyway, on a single customer's spreadsheet.

The setup

Where it stands — Datadog's growth accelerated to a two-year high while one AI customer's usage cut pulled next quarter's guide seven points lower.

Would confirm — Third-quarter revenue landing above the $1.145bn top of guidance with net revenue retention still above 120%.

Would invalidate — A second large AI account disclosed as optimizing, or gross margin falling below 78% as inference costs build.

Watch next — Snowflake reports its July quarter after the close on 2 September, with product revenue guided to $1.415–1.42bn.

Valuation — Datadog at 26.6x trailing and 23.6x forward gross profit, against Dynatrace near 8.4x and Elastic at 6.8x.