Datadog's (DDOG -1.43%) stock price dropped 7% after it posted its fourth-quarter report on Feb. 16. The data visualization software provider's revenue rose 44% year over year to $469 million, which beat analysts' estimates by $21 million. Its adjusted net income grew 28% to $90 million, or $0.26 per share, and topped expectations by seven cents.
For the full year, Datadog's revenue rose 63% to $1.68 billion as its adjusted net income grew 103% to $338 million. That represented a slight slowdown from 2021 when its revenue and adjusted net income increased 70% and 133%, respectively -- but it's still growing faster than many of its enterprise software peers.
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However, Datadog still lost more than half its value over the past 12 months as rising rates plucked the wind out of its sails. Let's review the bear and bull cases to see if this hypergrowth stock can make a comeback over the next few quarters.
What the bears will tell you about Datadog
Datadog's cloud-based platform collects diagnostic data from an organization's servers, databases, and software in real time. It aggregates that information onto unified dashboards for IT professionals, which makes it easier to spot potential problems.
That silo-busting approach is innovative, but the bears will point out that the company's growth is cooling off. For the first quarter, it expects its revenue to only rise 28%-29% year over year, compared to analysts' projections for 33% growth. For the full year, it expects its revenue to increase by 23%-24%, which also missed the consensus forecast for 30% growth.
It attributes that slowdown to macro headwinds for its lower-end customers and more conservative cloud spending across the enterprise market. During the conference call, CEO Olivier Pomel said Datadog's growth would reaccelerate "at some point" in the future as the cloud market warms up, but said it was "too difficult" to forecast amid this "level of macro uncertainty."
Datadog also expects its margins to be squeezed as its near-term growth cools off. On a non-GAAP (generally accepted accounting principles) basis, its operating margin expanded from 16% in 2021 to 19% in 2022, but it expects that figure to drop to 14%-15% in 2023. Unlike many other tech companies, which are laying off workers amid slower growth, Datadog still plans to increase its headcount by a mid-20s percentage in 2023.
That's a slowdown from its headcount increase of about 50% in 2022, but that ongoing expansion indicates it's prioritizing its long-term growth over its near-term profits. Datadog still expects its adjusted EPS to rise 4%-11% in 2023, but that also comes in far below Wall Street's expectations for 15% growth.
Investors might be more forgiving of that slowdown if Datadog's stock were trading at lower valuations. But at $80, Datadog still trades at 76 times forward earnings and 12 times this year's sales. JFrog, another silo-busting software play, is growing at a similar rate but trades at just 7 times this year's sales. Last but not least, Datadog remains unprofitable on a GAAP basis, and its net loss more than doubled from $21 million in 2021 to $50 million in 2022. All those issues could make Datadog an unbalanced and unappealing investment as long as interest rates keep rising.
What the bulls will tell you about Datadog
The bulls will tell you that Datadog is still growing at a healthy clip. Its total number of customers rose 23% year over year to 23,200 at the end of the fourth quarter, while its number of larger customers (those that generate over $100,000 in annual recurring revenue) increased 38% to 2,780. The expansion of that higher-value cohort should boost its margins and reduce its dependence on smaller and more macro-sensitive customers.
At the end of the fourth quarter, 42% of the company's customers were using four or more of its products, up from 33% a year ago, while its dollar-based net retention rate -- which gauges its year-over-year growth per existing customer -- has stayed above 130% for 22 consecutive quarters. Those numbers indicate that Datadog's strategy of "landing and expanding" is paying off.
Datadog's non-GAAP gross margin also expanded to 80% in 2022, compared to 78% in 2021 and 79% in 2020. Obstler expects that percentage metric to remain in the high 70s in the "mid to long term" as economies of scale kick in for its cloud infrastructure costs. Those stable gross margins also indicate it has plenty of pricing power.
As for its widening GAAP losses, they can mainly be attributed to the stock-based compensation (SBC) expenses, which consumed 22% of its revenue in 2022. Once it reins in its SBC, its GAAP numbers could quickly improve.
Which argument makes more sense?
Datadog could still have plenty of upside potential over the long term, but the bears could remain in control this year as the company's growth cools off. Its stock still isn't cheap, and its forward price-to-sales ratio could drop to the single digits before it's considered a bargain. Therefore, investors should keep an eye on Datadog, but it's too early to turn bullish right now.
