What happened
Shares of Datadog (DDOG 4.95%) fell 15.6% this week through Thursday trading, according to data from S&P Global Market Intelligence. The cloud observability leader, which makes products to secure and monitor the health of cloud-based software applications for enterprises large and small, fell sharply when management reduced its outlook for the year.
But is this sell-off based on the next few quarters' growth outlook reason to sell the stock? Or pick up some discounted shares?
So what
In the second quarter, Datadog reported revenue of $509 million, up 25.3% from the prior year, and adjusted (non-GAAP) earnings per share of $0.36. Both figures beat expectations, but the stock fell some 20% as management also lowered full-year guidance in conjunction with second-quarter results. Management now sees full-year revenue between $2.05 billion and $2.06 billion, relative to its prior guidance of $2.08 billion and the analyst consensus of 2.09 billion.
On the conference call with analysts, management elaborated that while new customer growth remained quite strong, as did cross-selling customers to adopt more of its software products, current customer spending growth slowed more than thought, as clients still tried to optimize cloud spend and cut costs amid economic uncertainty.
This was a bit of a surprise as it was known that cloud spending had been slowing over the past year and was thought to be bottoming. This earnings season, some of the major cloud infrastructure players actually noted optimizations might be coming to an end with growth stabilizing. Therefore, to see Datadog lower guidance based on this phenomenon was somewhat of a surprise.
But management noted that customers who began optimizing their spend earlier than others had actually stabilized their spending growth exiting the quarter, with July improving over Q2. However, others were still amid their cost-cutting journey. So perhaps Datadog was feeling the slowdown with a bit of a lag relative to cloud spending overall. On that subject, CEO Olivier Pomel said:
There are some optimizations that are specific to observability, there are others that are specific to the cloud that maybe is also specific to different clouds of which we have a different mix than the rest of the industry. So, when you combine all of that, you might see some different timing effects in terms of how various optimization might hit us versus others.
Now what
While it was certainly not a pleasant earnings reaction, Datadog had been up strongly in the month and this year leading up to earnings. So to see it pull back on this news was no surprise.
However, there were some silver linings. Management noted that July was trending better than the second quarter, though it's still too early to draw conclusions. In addition, while existing customers were in cost-saving mode, Datadog had its best second quarter ever in terms of new customer additions and its second-best quarter ever for new customer additions outside of last year's fourth quarter, which is a seasonally higher quarter. In addition, Datadog noted record-high new customer deals of $100,000 or more in annual commitment.
So it's quite possible that once its customers' cautious posture passes, Datadog's growth could reaccelerate. Datadog has posted impressive growth over the past few years as its observability suite has found favor with enterprises moving to the cloud. Given the strong new customer additions, its competitive position doesn't seem to be the issue.
