The bear market in the technology sector has been brutal this year, with many individual stocks declining by 50% or more as soaring inflation hits the pocket of the consumer. The sell-off has been largely indiscriminate as investors expected the financial results of the tech industry to take a hit across the board.
But that hasn't been the case. In a few unique cases, companies have maintained their strong growth rates from 2021, especially those in the software space that sell their technology to other businesses rather than consumers.
Datadog (DDOG -1.02%) is one of them, with sales soaring in the first half of 2022. Its stock hit a 52-week low of $81.12 in June, and one Wall Street investment bank predicts it could soar to $214 within the next 12 to 18 months. It has already recovered to $103.84 as of this writing, but that still leaves plenty of room to the upside for investors who buy it now.
A new era in cloud monitoring
Almost everything is done online now, from banking and financial services to retail and commerce. Even the most popular console games, which have historically been enjoyed in story mode, have an online component to them. It's because consumers continue to demand more convenience and more excitement from their everyday activities.
Cloud technology has facilitated this big shift into the online realm, and while it has provided countless opportunities for businesses to tap new revenue streams, it has also presented challenges as organizations are receiving mountains of data about their customers' experiences. Helping to make sense of this information is where Datadog shines.
A financial services firm, for example, might have millions of customers tapping into its mobile application or website in a single day. How does that firm ensure each customer is having a positive, bug-free experience? Developers and engineers can use Datadog's dashboard to gain as much of an insight as they could possibly need, complete with alerts that can bring incident response times down to minutes instead of hours or days.
For gaming companies, Datadog can help to identify issues triggered by scaling or usage spikes. It can even track each player's experience by geographic region and operating system to uncover bugs affecting small subsets of users, which might have otherwise gone unnoticed. Plus, the company helps improve monetization by giving developers visibility over the in-game purchase process -- for example, it can be useful to know at what point a potential customer abandoned a shopping cart.
Datadog's financial growth is soaring
Even in the face of a broad global economic slowdown, Datadog is delivering blistering growth. In the recent second quarter of 2022 (ended June 30), the company generated $406 million in revenue, which was a 74% jump compared with the year-ago period.
Additionally, it reported that 2,420 customers now fall into its highest-spending category of $100,000 annually, which was up 54% from 1,570 in the second quarter last year. It highlights the growing need for observability tools as large organizations shift more of their workloads and customer experiences into the cloud.
Datadog has also marginally increased its sales guidance for the 2022 full year to $1.63 billion, and if it hits that mark, it will mean the company has grown at a compound annual rate of 65% since it went public during 2019.
The company hasn't been consistently profitable yet on a generally accepted accounting principles (GAAP) basis, though it's knocking on the door. It lost just $20.7 million in 2021 on over $1 billion in revenue, and it has eked out a small profit of $4.8 million in the first half of 2022.
Given Datadog is growing so quickly, it's acceptable to continue investing aggressively in customer acquisition and sacrificing profits (for now), especially since it has plenty of resources at its disposal with over $1.7 billion in cash, equivalents, and marketable securities on its balance sheet. Put simply, making money doesn't have to be the company's No. 1 goal right now.
Wall Street is on board with Datadog stock
The Wall Street Journal tracks 26 analysts covering Datadog stock, and not a single one recommends selling. That's a remarkable stat given the negative sentiment toward the technology sector this year. Of the 26 analysts, 17 have given the stock the highest possible buy rating, with four rating it overweight (bullish), and the remaining five holding a neutral stance.
But Wall Street investment bank Goldman Sachs is particularly bullish, betting that Datadog stock could soar to $214 over the next year or so. That would be a 112% jump from where it trades today, and if it gets there, it will mark a 163% gain since the stock hit its 52-week low just three months ago.
Datadog is rapidly adding big-spending customers, its sales are soaring, and it appears to be on the cusp of true GAAP profitability on a more consistent basis. With Wall Street firmly in its corner, investors might do well to buy the stock now and strap in for the long run.