Over the last two months, U.S. companies have been reporting their financial results for the quarter ended June 30. This is a crucial time for investors, because they can look under the hood of the companies they own to assess how they're handling this challenging economy.
This earnings season has featured some impressive results, but it has also come with a few disappointments, and Datadog (DDOG 4.95%) falls into the latter category. While the cloud-observability company generated more second-quarter revenue than it had expected, it reduced its full-year forecast for 2023, which led to a 17% drop in its stock price shortly after it released its results.
But that hasn't deterred Wall Street. The Wall Street Journal tracks 39 analysts covering Datadog stock, and they are overwhelmingly bullish. In fact, not a single analyst recommends selling, and here's why investors should follow the Street's lead.
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Datadog just introduced new products powered by artificial intelligence
Datadog has developed a broad portfolio of software products, but cloud observability is the company's specialty. It helps businesses monitor their cloud-based networks -- from back-end operations to customer-facing sales channels -- to automatically spot technical issues.
Take a retailer, for example. In a physical store, the salesclerks can determine each customer's shopping experience by how much they purchase, their direct feedback, and their general mood. But when that same retailer serves thousands of customers online, it's nearly impossible to determine whether they have each had a positive experience. And with competitors a mere click away, that's crucial information.
Datadog can monitor each online sales channel for bugs that might hurt the customer experience, so the business can rectify them before they result in lost sales. And that process is about to get more efficient thanks to the introduction of Datadog's Bits AI, which is an artificial intelligence (AI)-powered co-pilot released earlier this month.
Businesses can converse with Bits AI to quickly identify, diagnose, and rectify technical issues, which has the potential to save developers countless hours of manual legwork.
Datadog also recently unveiled its new observability tool for developers of large language models (LLMs), which are typically used to power generative AI applications. In a similar fashion to its cloud monitoring tools, Datadog's platform will help troubleshoot LLMs' health, cost, and accuracy in real time.
It can even diagnose a phenomenon called model drift, which occurs when AI models are deployed into the real world and exposed to new data, which can affect their accuracy.
Datadog delivered a mixed second quarter
Datadog is grappling with the same broad economic challenges as many other organizations are right now. In its second-quarter conference call with investors, its management team said usage growth slowed among existing customers.
That was backed up by the company's net revenue retention rate, which dropped to 120% from 130% in the year-ago period. It implies existing customers only increased their spending by 20% in the second quarter, compared to 30% previously.
Nonetheless, second-quarter revenue came in at $509.5 million, which was comfortably above its guidance for $502 million. Growth in new customers remained strong; the company ended the quarter with 26,100 businesses on board, including 2,990 that were spending at least $100,000 annually on the platform -- an increase of 23% year over year.
However, the uncertain macroeconomic outlook prompted the company to reduce its full-year revenue forecast to $2.06 billion from $2.1 billion previously.
On the plus side, Datadog said there was evidence this period of cloud optimization -- in which businesses focus more on managing costs than investing for growth -- might be coming to an end. That bodes well for revenue, despite the company's cautious guidance.
Wall Street remains overwhelmingly bullish on Datadog stock
As I touched on at the top, Datadog stock plunged 17% immediately following the release of second-quarter results. It has recovered some of that loss, but overall, it still trades 53% below its all-time high, which was set during the tech frenzy of 2021.
That spells opportunity for investors who can see past the short-term economic headwinds and focus on the long run. Of the 39 analysts tracked by The Wall Street Journal, 22 have given Datadog stock the highest-possible buy rating. A further 7 are in the overweight (bullish) camp, and the remaining 10 recommend holding. Not a single analyst recommends selling.
That's a strong consensus. The 39 Wall Street analysts have an average price target of $106.13 on the stock, which implies it could rise by 18% from where it trades today. But the Street-high target is $135, which points to a potential gain of 50%!
The trend toward digitization in the broader economy will likely stick around for years, if not decades, so the adoption of technologies like cloud computing and AI will continue to grow over time. As a result, monitoring tools will always have a place in businesses' software stacks, which makes Datadog stock a great long-term buy, especially while it's so heavily beaten down.
