Few tech innovations are as important to modern organizations as the cloud. A company can rent computing power from centralized data centers (which are often managed by tech giants) and run its operations online for a fraction of the cost of building and maintaining its own infrastructure.
This allows the company to hire remote workers and reach a global customer base (to name just a couple of benefits), but it also comes with challenges. Digital networks are complex, especially for large organizations, and they require round-the-clock supervision to prevent technical issues from hurting the customer experience or denting sales. Datadog (DDOG -6.19%) helps 28,000 businesses meet those challenges.
The Wall Street Journal tracks 44 analysts covering Datadog stock, and the majority give it the highest possible buy rating. In fact, not a single analyst recommends selling. With the stock trading 39% below its all-time high, here's why now might be a great time to buy.
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Datadog serves a critical (and growing) need
Datadog's customer base includes retailers, financial institutions, healthcare providers, entertainment companies, and more. Businesses in each of those industries are grappling with the complexities that come with digitization, especially as consumers expect more real-time experiences from the products and services they use each day.
Take retailers, for example, who used to rely solely on physical stores before e-commerce was a thing. It was very easy for a business owner to measure customer satisfaction because there was always a sales attendant in-store who could receive customers' feedback and meet their needs. Selling products online is a totally different ball game, because customers are faceless and a competitor's website is only one click away.
Occasionally, technical glitches might render a website inaccessible in one part of the world or for a specific subset of customers, and the business owner might not find out until a decline in sales made it obvious. Datadog's job is to monitor the business's cloud infrastructure round the clock to spot those glitches and notify management so they can be rectified before they impact the customer experience.
Datadog recently launched an artificial intelligence (AI)-powered virtual assistant called Bits AI that enhances the platform's capabilities. It can identify incidents, create summaries, and autonomously alert managers on workplace collaboration platforms like Salesforce's Slack. Plus, thanks to its chatbot interface, managers can also query its data and ask for recommendations on how best to resolve critical issues.
However, Bits AI isn't Datadog's only foray into the AI industry. It launched a monitoring tool last year specifically for large language models (LLMs) and generative AI applications that allow developers to do everything from rapidly troubleshooting technical bugs to monitoring the cost of their projects.
Datadog is growing quickly, and profitably
Datadog just reported its financial results for the first quarter of 2024 (ended March 31). The company generated $611 million in revenue, representing 27% growth from the year-ago period. It was comfortably above management's forecast of $589 million, which is impressive in an uncertain environment where many of Datadog's customers might be grappling with high interest rates and pressure from shareholders to cut costs.
Speaking of which, Datadog has focused heavily on improving its own profitability of late. The company only increased its operating costs by 17.4% in Q1, which was obviously much slower than the pace at which it grew revenue, and that allowed more money to flow to its bottom line. As a result, Datadog's net income came in at $42.6 million, which was a positive swing from the $24.1 million net loss it generated in the year-ago period.
Simply put, Datadog is proving to investors that it can maintain solid revenue growth without spending excessively on things like marketing, which means its profitability should be sustainable over the long term.
AI is also making a growing contribution to Datadog's overall results. The company said its next-gen AI customers (those focused on developing AI) accounted for 3.5% of its annual recurring revenue (ARR) in Q1, which was up from 3% just three months earlier (with Datadog's total ARR being somewhere north of $2 billion).
Wall Street is very bullish on Datadog stock
As I touched on at the top, Datadog stock trades down 39% from its all-time high, which was set during the tech frenzy in 2021. Its valuation was a little ambitious back then, but the company has done nothing but grow and expand since, which makes the decline look like an attractive buying opportunity.
Wall Street appears to agree. Of the 44 analysts tracked by The Wall Street Journal, 25 have given Datadog stock the highest possible buy rating. A further seven are in the overweight (bullish) camp, while 12 recommend holding. Not a single analyst recommends selling.
Datadog faces an unprecedented long-term opportunity in AI. The technology could add somewhere between $7 trillion and $200 trillion to the global economy in the next decade, depending on which Wall Street forecast you rely on. LLMs will only grow in complexity as we demand more functionality from our AI applications, so monitoring and observability tools will be paramount to success for developers, and that's great news for Datadog.
