Shares of Datadog (DDOG 3.58%) set the market on fire this month with terrific gains of 42% so far, with the company's first-quarter 2023 results, which were released on May 4, playing a key role in its breakout.
Datadog stock is now up 26% in 2023 thanks to its latest rally. The stock underperformed the market in the past year thanks to concerns that its growth is slowing. But it looks like investors have now realized the company's robust long-term potential and are focusing on the bigger picture, which explains why the stock shot up remarkably following the company's earnings report.
Does this mean investors who didn't buy into Datadog's rally this month missed an opportunity to buy this fast-growing company at an attractive valuation? Let's find out.
Datadog stock is trading at a rich multiple
Datadog stock now trades at 16.4 times sales. It is worth noting that its shares were trading at less than 12 times sales at the beginning of May before the rally began.
DDOG PS Ratio data by YCharts
So, the stock wasn't cheap even before its latest rally considering that the S&P 500 index sports an average price-to-sales ratio of 2.4. But then, Datadog has tended to trade at rich multiples over the past three years, as evident from the chart below.
DDOG PS Ratio data by YCharts
The chart above suggests investors are getting a relatively good deal on Datadog even after its red-hot rally this month, and they may want to take this opportunity before this cloud stock flies higher.
The cloud specialist is at the beginning of a massive growth curve
Datadog's first-quarter revenue increased 33% year over year to $482 million, surpassing the consensus estimate of $470 million. The company's non-GAAP net income came in at $0.28 per share, up from $0.24 per share last year and well ahead of analysts' expectations of $0.23 per share.
The company's impressive year-over-year growth was driven by a solid jump in its customer base as well as an improvement in customer spending. More specifically, Datadog finished the quarter with 25,500 customers, up 29% from the prior-year period. Additionally, the number of customers who generate at least $100,000 in annual recurring revenue (ARR) for Datadog increased by 29% to just over 2,900.
The company also finished the quarter with a dollar-based net retention rate of more than 130%. As this metric compares the revenue generated by Datadog's customer base at the end of a particular period to the revenue generated by the same customer cohort in the year-ago quarter, a reading of more than 100% suggests that the adoption of its cloud monitoring and security applications improved.
This is also evident from the fact that the percentage of customers using six or more Datadog products increased to 19% last quarter, up from 12% in the year-ago quarter. The percentage of customers using four or more products increased by 8 percentage points to 43%.
It is not surprising to see why Datadog has been successfully attracting new customers and is also winning a stronger share of their wallets. The company provides multiple solutions for monitoring cloud infrastructure, including network performance, device monitoring, database monitoring, cloud security management, and application security management, among others.
So, the growth in spending on cloud solutions should ideally lead to an improvement in the company's addressable market. Datadog points out that cloud spending could jump from an estimated $500 billion last year to $1 trillion by 2026. As a result, its total addressable market is expected to jump from $41 billion in 2022 to $62 billion in 2026.
Given that Datadog generated $1.8 billion in revenue in the trailing 12 months, it is easy to see that the company's terrific growth is likely here to stay for a long time.
It isn't too late to buy this potential long-term winner
The massive addressable market on which Datadog sits is reflected in the company's outlook as well. Management expects Datadog to deliver $2.1 billion in revenue in 2023, which would be a 25% jump over last year. More importantly, its top-line growth is expected to accelerate in 2024 and 2025 as compared to this year.
DDOG Revenue Estimates for Current Fiscal Year data by YCharts
Assuming Datadog does manage to hit $3.5 billion in revenue for 2025 and continues to trade at 16 times sales as it does now, its market cap could hit $56 billion. That would translate into an 86% upside over the next three years compared to the company's current market cap of $30 billion. So, investors looking for a growth stock can still buy Datadog, as its hot rally seems here to stay.
