Direct Query in Power BI is when you DO NOT load the data into your Power BI data model, you just load the meta data. The source data remains in the original data source location, often on-premises, and a technique that some clients prefer such that their source data is not in the Azure cloud.
When the charts in your Power BI reports & published dashboards ‘run’ they query the original data source using Direct Query.
Some DAX funtions will not work in DIrect Query.
This Power BI solution architecture means your reports will be slower than a normal Power BI Azure solution (where the dataset is in the Azure cloud ‘next’ to your Power BI dashboards with minimal latency as they are ‘close’ to each other ran on in memory VertiPaq.)
Queries from your dashboards use direct query to access the original data source and the resulting metadata is transferred over the internet to the self service BI end user….latency can be a few seconds.
Read more on this on SQLBI and download their DirectQuery in Analysis Services – Whitepaper for a deeper understanding.
Direct Query is advised when your database is too big to fit in memory and latency is not critical.