Shares of Datadog (DDOG 1.30%) cratered on Wednesday, following the company's third-quarter earnings report. The maker of monitoring tools for cloud computing systems crushed Wall Street's estimates, but some investors felt that the surprise just wasn't big enough. Share prices fell as much as 13.9% on Wednesday morning, recovering somewhat to a drop of 11% by 11:30 a.m. EST.
Datadog's sales rose 62% year over year to $155 million. The bottom line moved from breakeven to adjusted earnings of $0.05 per share. Your average analyst would have settled for earnings near $0.01 per share on roughly $144 million in revenue. The company also offered fourth-quarter earnings guidance in line with the current Street view, and management's revenue target for the next quarter exceeded the analyst consensus by $8 million.
A handful of analysts downgraded the stock after the report, arguing that it looks overvalued in the light of decelerating revenue growth.
You can't really blame Datadog investors for taking some profits off the table today. The stock is still up by 145% in 2020 and 176% over the last 52 weeks, and that's after Wednesday's sharp correction. That being said, the company is delivering on all its promises and continues to set bullish guidance targets for the next report. The underlying business is in a great position to continue crushing the market for years to come. Selling the stock today looks like a big mistake in the long run.
"Companies globally and across all industries are prioritizing digital operations like never before, and the cloud is a clear strategic winner to enable greater agility and innovation," CEO Olivier Pomel said in the earnings call. "We continue to believe Datadog is a primary beneficiary of this trend and that we remain very well-positioned to win in the market."
I agree with that assessment and would consider buying Datadog at a generous but temporary discount today.