Datadog's largest customer, an artificial-intelligence company running 17 of its products under a nine-figure contract, renewed this summer — and then cut how much it consumed.

That single decision reset the company's forward line. Datadog, which sells cloud monitoring software — infrastructure metrics, application traces, logs and security alerts — priced by volume consumed rather than per user, had just reported its fastest growth in two years. June-quarter revenue of $1.1215bn was up 35.6%, the fourth straight quarterly acceleration. Management then guided the September quarter to $1.135–1.145bn, or 28–29%, and the shares fell 19% in a session on 6 August, with analysts widely identifying the customer as OpenAI.

Volume arrives, margin leaves

The usage cut is the visible problem. The quieter one is that metered AI traffic is the least profitable revenue Datadog books. Gross profit grew 33.4% in the June quarter against revenue's 35.6% — the wrong way round for a business whose case is that inference and agent telemetry compound into recurring revenue. Gross margin has fallen about 180 basis points over three quarters, to 78.6% from 80.4%, because the compute and hosting that ingest all that telemetry sit in cost of revenue. Agent activity is real: tool calls through Datadog's model-context-protocol server rose fourfold in a quarter. Each one costs something to store.

Demand-side friction is arriving too. Management said finance chiefs are pushing back on bills and that customer priorities have moved from validating AI to optimizing its cost — which is why Datadog launched pricing that eliminates unpredictable charges for high-cardinality metrics.

What the selloff obscured is that the non-AI business is in its best shape in years. Growth from customers with no AI story reached the high 20s, a fifth consecutive quarter of acceleration from 18% a year ago. Net revenue retention sits in the low 120s. Customers spending over $100,000 a year number 4,720 and supply 91% of recurring revenue, and 13% of all customers now run ten or more products, up from 7%. Free cash flow was $279m, a 25% margin.

Palo Alto's growth has a purchase price

Palo Alto Networks — firewalls plus subscription threat prevention, cloud and identity security sold to large enterprises and governments — is the seat-and-platform counter-case, and its headline growth is partly acquired. In its April quarter the company reported next-generation security annual recurring revenue (ARR) of $8.1bn, up 60% — of which $1.6bn came with CyberArk and Chronosphere, leaving roughly 28% organic. Remaining performance obligation of $18.4bn grew 36%, with $1.8bn acquired, or about 22% organic.

The purchase shows up elsewhere. Gross margin fell 539 basis points to 67.6%. GAAP operating income swung to a $183m loss. Diluted shares rose 5.2% to 744m, because CyberArk was bought in February for $21.1bn, mostly in stock. Adjusted free cash flow, at $910m against $578m, held up.

The move was the sector's, not theirs

Both stocks entered uptrends in the last week of May — Palo Alto's a full week before it published anything, on 2 June. May was the best month for software stocks since October 2001, and since 6 May the peers moved in step: Fortinet up 71%, Okta 73%, Snowflake 130%, against Datadog's 64% and Palo Alto's 95%. Fortinet is the counter-evidence on quality: it grew 25.6% with a record 33.7% operating margin and free cash flow tripled to $966m, and its shares fell over the past month.

That leaves the price. Datadog costs 26.59x trailing gross profit and 23.61x forward, against 16.98x in early May — expansion, though gross profit largely kept pace. Palo Alto is at 38.22x trailing and 29.30x forward, against 20.18x in early May and roughly 16.7x in February, an 89% re-rating since spring on trailing gross profit that grew 4.9%. It has published no financial statement since 2 June.

The setup

Where it stands — Datadog is 18% below its August peak on accelerating non-AI growth; Palo Alto is near highs on three-month-old numbers.

Would confirm — Datadog's September-quarter gross margin printing below 78% while revenue growth holds near the guided 28-29%.

Would invalidate — Gross margin recovering toward 80% with growth above 30%, or Palo Alto disclosing organic next-generation ARR growth above 35%.

Watch next — Palo Alto reports fiscal fourth-quarter and full-year results on 1 September, its first new information since 2 June.

Valuation — Datadog 26.59x trailing and 23.61x forward gross profit versus 16.98x in May; Palo Alto 38.22x and 29.30x versus 20.18x.