Datadog's (DDOG 0.92%) stock price surged 15% on May 4 after the data visualization company posted its first-quarter earnings report. Its revenue rose 33% year over year to $482 million and beat analysts' estimates by $13 million. Its adjusted net income grew 17% to $98 million, or $0.28 per share, and cleared the consensus forecast by $0.04 per share.
Datadog's headline numbers were impressive, but its stock still trades more than 60% below its all-time high from November 2021. Could this out-of-favor hypergrowth play bounce back over the next 12 months?
Image source: Getty Images.
Why did Datadog's stock drop from its all-time highs?
Datadog collects diagnostic data from an organization's servers, databases, and apps in real-time, then displays all of that information on unified dashboards. That approach breaks down the silos between different types of computing platforms, which makes it easier for IT professionals to quickly spot and diagnose problems.
Datadog has grown rapidly since its IPO in 2019. Between 2019 and 2022, its annual revenue grew at a compound annual growth rate (CAGR) of 67%. Its number of larger customers -- which generate at least $100,000 in annual recurring revenues (ARR) -- expanded at a CAGR of 48% from 858 at the end of 2019 to 2,780 at the end of 2022.
In the first quarter of 2023, that high-value cohort grew another 29% year over year to 2,910 customers. But if we look back over the past year, its growth in higher-value customers and total revenue has consistently decelerated.
|
Metric |
Q1 2022 |
Q2 2022 |
Q3 2022 |
Q4 2022 |
Q1 2023 |
|---|---|---|---|---|---|
|
(YOY) Growth in customers with ARR over $100,000 |
60% |
54% |
44% |
38% |
29% |
|
Revenue growth (YOY) |
83% |
74% |
61% |
44% |
33% |
Data source: Datadog. YOY = Year-over-year.
That slowdown wasn't too surprising, since it's incredibly difficult for a company to keep growing at 60%-70% over the long term. The macro headwinds have also forced many companies to rein in their spending on cloud-based software.
NASDAQ: DDOG
Key Data Points
That slowdown made it difficult for Datadog to justify its premium valuations. At its record high on Nov. 9, 2021, Datadog's enterprise value hit $60.6 billion -- or 36 times the revenue it would generate in 2022. That nosebleed valuation made it an easy target for the bears as rising interest rates drove investors toward more conservative investments.
Datadog expects its revenue to rise 24%-25% in 2023, which would represent a significant slowdown from its 63% growth in 2022. But at its current enterprise value of $23.2 billion, its stock trades at 11 times this year's sales.
That valuation is reasonable relative to other cloud-based companies with similar growth rates. ServiceNow, the digital workflow company which is expected to grow its revenue by 22% this year, trades at 10 times that forecast.
It's still ramping up its spending as its growth cools off
Datadog is still squeezing out more revenue from its customers. Its trailing 12-month dollar-based net retention rate (NRR), which gauges its year-over-year revenue growth per existing customer, has stayed above 130% ever since its IPO. But during the first quarter conference call, CFO David Obstler warned that ratio could drop "below 130%" in the second quarter.
Nevertheless, Datadog's adjusted gross margin still held steady year over year at 80% in the first quarter, which suggests it still has plenty of pricing power against similar data visualization companies like Cisco's AppDynamics and New Relic. But its adjusted operating margin still fell by five percentage points to 18%. That decline was caused by a 45% jump in its adjusted operating expenses, which was largely driven by a higher headcount across its R&D and go-to-market departments.
That increased spending might be considered a green flag for Datadog -- especially since many other tech companies are cutting costs and executing mass layoffs to cope with the recent headwinds -- but it expects those rising expenses to reduce its adjusted operating margin from 19% in 2022 to about 17% in 2023.
Datadog expects its adjusted EPS to rise 15%-22 for the full year. At $77, its stock trades at about 66 times the midpoint of that forecast. ServiceNow, which is expected to grow its adjusted EPS by 25% this year, trades at 46 times that estimate.
Where will Datadog's stock be in a year?
Datadog is still growing, but it can't be considered a hypergrowth stock anymore. Its valuations have cooled but they're not cheap yet -- which suggests its stock could merely tread water until the macro environment improves. Datadog's downside should be limited over the next 12 months, but I don't expect it to skyrocket toward its all-time highs anytime soon.
