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Is DataDog Stock a Buy?

By Robert Izquierdo - Mar 3, 2020 at 7:55AM

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Shares have risen steadily since its IPO. What factors continue to make this stock a buy?

In today's technology-driven world, businesses grind to a halt if their tech infrastructure experiences a hiccup. Enter monitoring companies like Datadog (DDOG -0.32%). Its software keeps tabs on a company's systems and provides the insights to troubleshoot problems.

That's why its software-as-a-service (SaaS) offering is in high demand. That high demand translates into increased revenue and, consequently, it helps the company deliver fourth-quarter results that beat analyst expectations.

And yet, the stock declined on the latest earnings report news. So is now the right time to buy Datadog?

Photo of the Datadog mascot, a stuffed white plush toy dog with a purple collar that reads "Bits" sitting on a table next to the purple Datadog logo.

Image source: Datadog.

Datadog's products

The demand for Datadog's solutions lies in the company's focus on supporting a modern technology architecture. Today's businesses employ an array of disparate systems in order to move faster and adapt to business conditions. But that architecture comes at the cost of high fragmentation. 

For instance, businesses today leverage microservices, a technique that breaks up large software applications into smaller components for improved control and management, as well as containers, which compartmentalize software to streamline the deployment of changes to that software. 

Having worked on multimillion-dollar software platforms that employ microservices and containers, I can tell you that monitoring all of these various systems is challenging. Datadog makes this vital task simple for its customers.

In addition, Datadog's products are designed for the red-hot cloud computing arena. This has allowed Datadog to ride the cloud computing wave to revenue growth. It also recently introduced a security monitoring tool, expanding its suite of products and giving its customers more reasons to stay with the company.

Datadog's stock

The challenge in assessing Datadog is that it's a recent IPO stock, having debuted last September. Therefore, it doesn't have much of a public track record. Although its time as a public company has been short, the results have been impressive. Fourth-quarter earnings revealed an 85% year-over-year revenue increase. In fact, the company has experienced double-digit revenue growth every quarter for the past year.

More importantly, the company has delivered these results while maintaining fiscal responsibility. Many technology stocks this new to the market tend to operate at a loss. Datadog's fourth-quarter results included net income of $891,000. It's not much, but given that the fourth quarter of 2018 delivered a net loss of $6.6 million, this is an impressive achievement. Moreover, the company has steadily grown its total assets from $179.8 million in Q4 2018 to more than $1 billion a year later with over $597 million of that in cash.

Datadog accomplished these results by encouraging existing customers to purchase multiple items with about 60% of its clientele using two or more products. It also achieved a dollar-based net retention rate of 130%, which means that Datadog kept 100% of its subscription revenue from the previous year while adding another 30% of revenue from existing clients. The company intends to continue expanding both its product line and markets serviced, such as growing its international footprint, as a means of increasing revenue.

The final verdict

Certainly, Datadog operates in a growing market, but this boon is also its challenge. Competitors like Splunk and New Relic are battling for the same customers. That's why the company's net retention rate is important, and its strength proves Datadog is keeping clients happy.

CEO Olivier Pomel stated on the last earnings call that Datadog is in the "early stages" of this market opportunity, so there's room to grow. The company backed this up with 2020 full-year revenue guidance of $535 million to $545 million. While this range represents a 49% year-over-year growth at its midpoint, it seems investors were disappointed with that growth rate, and the stock price declined. 

Given Datadog's strong asset position, history of fiscal prudence, and continued double-digit revenue growth, the dip in Datadog's stock price from its recent 52-week high of $50.12 provides a reasonable entry point for investors, making Datadog stock a definite buy.

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