Datadog (DDOG -3.94%) is a high-quality business and seeing tremendous growth but currently, the stock appears to be an expensive buy. In this segment of "The Morning Show" on Motley Fool Live, recorded on Feb. 15, Fool.com analyst Tim Beyers and Director of Small Cap Research Bill Mann discuss the company's appeal to investors.
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Tim Beyers: On the basis of narrative. There are like somebody asked, I don't remember who it was and the questions asked about Datadog in this. Datadog is trading, I think somebody pointed out at price-to-sales like 49, that is really expensive.
Bill Mann: Price to EBE.
Beyers: Yeah. Price to EBE of 49. [laughs] Yeah, which is very expensive.
Mann: Yeah, yeah.
Beyers: I would not try to tell you that that is cheap. Making a big bet on Datadog, to me personally, without giving any personalized advice here, to me, I would not feel comfortable making a huge bet on it.
But where I look at the overall narrative here, like when I pull in everything else, Datadog's growing much faster than that 49. They're growing much faster than say, like a Cloudflare (NET -3.01%). Also proving out its optionality very well. This gets to the other side of the equation, which is you look at the number, you look at the pricing model, and then how do you test the narrative?
The way you test the narrative, for me, is I started looking at the things that the company is talking about, and are they actually delivering, and are customers using them for more things? Is it clear to me that this revenue growth rate can persist at a much higher rate than you would normally consider for a long period of time because of the things that it's doing? I think in the case of Datadog, the answer for me right now is yes. I do believe that the answer to that is yes.
I believe that Datadog's narrative is pretty solid, but I think you're crazy to make an all-in bet on a company that trades for a price to EBE of 49, I would not make an all-in bet, but would I buy a share or two at current prices? Yeah, of course, I would. I think it's a high-quality business where the narrative makes sense to me. I like them much better when I have to pay a little for the narrative. I like to get bonus narrative.
