IPOs, data analytics, and surging stock prices ... oh my.

The year 2019 has been chock-full of noteworthy events for new tech stocks, and Datadog (NASDAQ:DDOG) is the latest to make its mark.

The software-as-a-service (SaaS) company surged 40% following its IPO last Thursday and it's currently valued at around $10 billion as of this writing. That's an impressive feat. Alphabet (NASDAQ:GOOGL)(NASDAQ:GOOG) bought data analytics peer Looker for $2.6 billion, and salesforce.com (NYSE:CRM) took data insights leader Tableau Software for $15.7 billion early in 2019. Meanwhile, still independent and much older data analysis companies Alteryx (NYSE:AYX) and Splunk (NASDAQ:SPLK) have market caps of $7.7 billion and $18.9 billion, respectively.

Datadog's debut onto the public scene (it was only founded in 2010) is impressive. However, while it's certainly no overhyped slouch, the price tag seems a little rich at this point. More operating history on Datadog is needed first.

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Image source: Getty Images.

Cloud advantages

Datadog is a cloud-based data analytics SaaS for technology development, operations, and business. Organizations that run apps and operations in the cloud can put the software to use to log events and preset metrics to gain insight into what's going on. Datadog's service also integrates with a growing list of apps and other cloud services to make it easy for organizations to set up and get started.

Just as its peers have been booming of late, Datadog also boasts some impressive numbers. The company said it has nearly 9,000 customers, and annualized quarterly revenue in the second quarter of 2019 was $333 million. 2018 revenue was up a white-hot 95% to $198.1 million, and it's setting a slower (but still impressive) pace through the first half of 2019. Paired with a report that the start-up had received a takeover offer from tech giant Cisco (NASDAQ:CSCO) -- which Datadog management rejected -- it's no wonder investors were eager to get in on the action. 

Metric

6 Months Ended June 30, 2019

6 Months Ended June 30, 2018

Change

Revenue

$153.3 million

$85.4 million

80%

Gross profit margin

73.9%

78.2%

(4.3 pp)

Operating expenses

$127.0 million

$66.5 million

91%

Net income (loss)

($13.4 million)

$498,000

N/A

Data source: Datadog. Pp = percentage point.  

Big data and big competition

There are a few concerns, though. First, as Datadog's sales grow, one might expect gross profit margins on services rendered to increase as well. The opposite is happening at the moment. Granted, there could be a number of factors reducing the margin, including the launch of new tools that thus far have few customers, the giveaway of free trial periods, and expansion to accommodate a future influx of customers. Nevertheless, it's worth keeping an eye on. Plus, peers Splunk and Alteryx, though larger companies, had gross margins of 79.4% and 89.1%, respectively, through the first half of the year.

Second, though an 80% growth rate is nothing to balk at, Datadog's momentum is slowing. That could simply be the natural order of things as growth tends to ease up as a company gets bigger. It could also be because of plentiful competition, though. There's simply no shortage of data analytics tools out there, and all of them are going gangbusters right now -- including some big heavy hitters like the aforementioned Salesforce, Alphabet, and Splunk.

Finally, there's valuation. Datadog operates at a loss at this point, partly by design as it spends to try and maximize its potential now. While this isn't an uncommon situation these days in the world of high tech, it can give some investors fits when it comes to deciding on a value to place on the company. One common metric we're left with is the price-to-sales ratio, and Datadog goes for a rich 41 times trailing-12-month revenue. Fellow fresh IPO CrowdStrike Holdings (NASDAQ:CRWD) trades for a similar amount, currently at 43 times 12-month revenue, but CrowdStrike is growing even faster than Datadog, with a 98% year-over-year increase in sales so far in 2019. "Only" growing at 80% would imply Datadog is more expensive than CrowdStrike at this particular point in time. If sales continue to decelerate, the stock could be in for a breather. 

Put simply, I'd like to see at least a couple of earnings reports and listen to management comments on the state of business before buying some shares of Datadog. However, with digital transformation sweeping across the globe and data-driven insights in high demand, it's worth keeping an eye on this hot new stock.