What happened
Shares of Datadog (DDOG 4.95%) were down 5% as of 12:59 p.m. ET on Thursday. The software company reported slowing growth in the fourth quarter but still beat the consensus analyst estimate on revenue and earnings. The main issue was management's weak guidance.
The post-earnings drop brings the stock's year-to-date return to just under 15%. Investors clearly had high expectations for continued momentum in 2023, but they are having to readjust their forecasts.
So what
Datadog is executing well, particularly in winning over large customers. The number of customers spending over $1 million with Datadog grew 47% year over year. Total revenue increased by 44% year over year in the quarter. But it's the trajectory of quarterly growth that has the market concerned.
Datadog entered the quarter with a high price-to-sales ratio of about 18, which implies high growth expectations. But fourth-quarter growth shows a noticeable deceleration over the third quarter's 61% revenue increase.
Now what
Overall, management noted slower usage growth with existing customers, which will carry over into the first quarter, as noted by guidance. Management is now calling for revenue to be between $466 million and $470 million, representing an increase of 28% to 29% year over year. That's a steep deceleration, which explains why the stock is falling today.
While Datadog is seeing strong retention of existing customers and generated over $350 million of free cash flow last year, investors need to see more top-line growth to justify paying 74 times free cash flow. The lack of momentum may send the stock down further in the near term.
