What happened
Shares of Datadog (DDOG 4.95%) were down 19% as of 12:19 p.m. ET on Tuesday. The software monitoring provider reported revenue growth of 25% year over year but issued cautious commentary about near-term revenue trends.
So what
Slowing top-line growth has weighed on top software stocks. Despite falling 46% from their previous peak, Datadog shares still trade at a high price-to-sales ratio, so news that revenue will likely remain under pressure through the end of the year is not what Wall Street wanted to hear.
While revenue of $509.5 million in the quarter was better than previous guidance, management noted that some large customers are still optimizing their spending on the cloud. Like other cloud service providers, Datadog earns money on a consumption basis. The company grows revenue as customers expand their workloads in the cloud.
On the bright side, Datadog continues to maintain strong margins. Adjusted operating margin was 21%, consistent with the year-ago quarter. Free cash flow was $142 million in the quarter, representing a healthy margin of 28% to revenue. But with the stock still trading at an expensive valuation, the market is more focused on slowing revenue growth.
Now what
While management cited early signs of spending trends improving with its customer base, guidance for the rest of the year could weigh on the stock in the near term.
Management expects third-quarter revenue to be between $521 million to $525 million, while full-year revenue should be $2.05 billion to $2.06 billion. Full-year guidance represents a 22.6% increase over last year, which doesn't give the stock much support while trading at a high price-to-sales ratio of 15.2.
