Datadog, Dynatrace under pressure after Palo Alto buys rival

In a busy day for Palo Alto Networks (PANW), the company reported quarterly results on Wednesday and announced it will acquire Chronosphere for $3.35B as it looks to strengthen its AI offerings. Commenting on the news, BMO Capital said it was a “bit surprised” by the timing of the acquisition given the pending CyberArk (CYBR) deal and highlighted that the Chronosphere buyout price is “not cheap” for Palo Alto. Meanwhile, BofA told investors it sees implications for public observability vendors Datadog (DDOG), Dynatrace (DT), and Elastic (ESTC), arguing that they “need to keep their innovation engines running on full speed” to drive share gains.

CHRONOSPHERE ACQUISITION: Palo Alto Networks announced it has entered into a definitive agreement to acquire Chronosphere, a next-generation observability platform built to scale for the AI era. This acquisition will strengthen Palo Alto Networks’ ability to help organizations navigate a world where modern applications and AI workloads demand a unified data and security foundation. Under the terms of the agreement, Palo Alto Networks will acquire Chronosphere for a total consideration of $3.35B, to be paid in cash and replacement equity awards, subject to adjustments. Chronosphere reports generating annual recurring revenue of over $160M as of the end of September 2025, growing ARR triple-digits year-over-year. The acquisition is subject to customary closing conditions, including regulatory approvals, and is expected to close in Palo Alto Networks’ second half of fiscal 2026.

QUARTERLY RESULTS: Palo Alto Networks also reported earnings with Q1 adjusted EPS coming at 93c and Q1 revenue at $2.5B, versus consensus of 89c and $2.46B, respectively. The company said it sees Q2 adjusted EPS of 93c-95c, better than consensus’ 46c, and Q2 revenue of $2.57B-$2.59B, with consensus at $2.58B. Additionally, Palo Alto Networks raised FY26 adjusted EPS view to $3.80-$3.90 from $3.75-$3.85, and FY26 revenue view to $10.5B-$10.54B from $10.475B-$10.525B.

PRICE NOT CHEAP: Capital analyst Keith Bachman is a “bit surprised” by the timing of Palo Alto Networks’ acquisition of Chronosphere given the pending CyberArk deal. The leverage between Palo Alto and Chronosphere is less than that between Palo Alto and CyberArk, the analyst tells investors in a research note. BMO believes Chronosphere is well suited for workloads that require high scalability, but says the company does not have the breadth of features that Datadog or Dynatrace offer. However, some workloads do not require all the features, the firm adds. It thinks the artificial intelligence market can help generate more workloads and revenue for observability providers. The purchase price is “not cheap,” according to BMO, which keeps an Outperform rating on Palo Alto with a $230 price target.

IMPLICATIONS: After Palo Alto Networks announced it has agreed to acquire private observability software vendor Chronosphere for $3.35B, BofA laid out the firm’s views on the acquisition’s implications for public observability vendors Datadog, Dynatrace, and Elastic, arguing that they “need to keep their innovation engines running on full speed to ensure their product offerings are disruptive and differentiated to drive share gains.”

Pointing out that Palo Alto management said that Chronosphere is able to deliver a comparable offering at a third of the cost of industry leading solutions, the firm believes pricing compression risk “could become topical again,” adding that the acquisition will be topical on Elastic’s fiscal Q2 earnings call. What BofA thinks is “the most interesting about this acquisition” is that observability and security vendors “see each other’s total addressable markets as growing, attractive, and up for grabs…and likely even more so in an AI fueled future.”

PRICE ACTION: In morning trading, shares of Datadog and Palo Alto are down about 5% each at $167.59 and $190.39, respectively, while Dynatrace’s stock is slipping almost 3% to $44.08.