June 2022 marked the official beginning of a bear market as the S&P 500 index closed 20% below its all-time high, which met the technical criteria. Wall Street was in agreement, and the index continued to slide until October.
But the S&P 500 has recently traded more than 20% above that October low point, which prompted some analysts to declare the beginning of a new bull market. Others disagree, though, because they believe the index needs to reclaim its previous all-time high before the bulls are back in charge.
No matter which camp is right, history shows the broad market will rise to new heights over the long run. And while the Street is divided on the official classification of the market, it does have a clear bullish consensus on one stock.
The Wall Street Journal tracks 37 analysts covering cloud-monitoring stock Datadog (DDOG 4.95%), and the majority have given it the highest-possible buy rating. Here's why.
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Datadog just added artificial intelligence to its platform
First, what is cloud computing? Businesses used to store their data and host their websites by maintaining physical server hardware on location, which was expensive. Today, tech leaders like Amazon and Microsoft manage enormous, centralized data centers that businesses can rent for a small fraction of the cost.
Businesses can store their data and host their online sales channels without owning any physical infrastructure -- that is, they can operate in the cloud. But with so many facets of an enterprise now running online, tracking things like technical faults or even customer satisfaction requires specialized tools, and that's where Datadog comes in.
A business might be completely unaware its website is down in one specific region of the world, or for one specific group of customers, until it notices a drop in sales. Datadog's cloud observability platform monitors for those issues around the clock, so the business can rectify them before they affect the customer experience. And now, thanks to a new generative artificial intelligence (AI) tool, it's easier than ever to drill down to the root cause of a given problem.
It's called Bits AI, and it serves as a chatbot (much like ChatGPT) that is embedded in the Datadog platform. Operators can converse with Bits AI to identify, diagnose, and rectify faults far more quickly. It's effectively a hyper-intelligent assistant that knows the business' network inside and out.
That isn't the only way Datadog is exploring AI. It just launched an observability tool specifically for developers of large language models, which are foundational to generative AI applications. It can help them track the cost and the accuracy of a model in an automated fashion, saving hours of manual legwork.
Datadog expects a slow end to 2023, but there are positive signs on the horizon
The last 18 months have been marred by elevated inflation and rising interest rates, which have increased the cost of doing business. As a result, most software companies have seen their customers trim back spending and focus on optimizing their digital infrastructure for efficiency rather than investing in growth.
In the second quarter, that trend prompted Datadog to reduce its full-year revenue guidance to a range of $2.05 billion to $2.06 billion. The good news: The company is seeing evidence this tough period is coming to an end, which means it could experience a reacceleration in the new year.
With all of that said, Datadog's growth is still quite robust. Its second-quarter revenue of $509.5 million was up 25% year over year, and it also saw a 24% jump in the number of customers with annual recurring revenue of $100,000 on its platform.
That shows larger organizations view cloud monitoring as increasingly crucial -- and even a value-add to their business -- which bodes well for Datadog.
The company is also carefully managing costs, and its second-quarter net loss came in at just $3.9 million (or $0.01 per share). The company is treading water through this difficult economy and is waiting for the right time to start reinvesting more aggressively in growth. With over $2.1 billion in cash and marketable securities on its balance sheet, it is equipped to do so.
Bull market or not, Wall Street is very bullish on Datadog
Like many tech stocks, Datadog peaked during the tech frenzy of 2021 when interest rates were at record lows and the U.S. economy was thriving on trillions of dollars in economic stimulus. Its stock is currently trading 52% below that all-time high, which might be a great long-term opportunity for investors.
As I mentioned above, The Journal tracks 37 analysts covering Datadog, and 20 of them have given it the highest-possible buy rating. Another seven are in the overweight (bullish) camp, while 10 recommend holding. No analysts recommend selling.
Their consensus price target of $105.36 implies an upside of only 15% from where the stock trades today, but that's based on a short-term outlook. And many experts believe the Federal Reserve will begin cutting interest rates in mid-2024, which should drive more confidence in the corporate sector and among investors.
Lastly, cloud computing will only grow its reach as time progresses, especially because the cloud is where most AI applications are now being developed. Datadog clearly has its finger on the pulse of that trend with its new tools, so investors might do well to heed Wall Street's recommendation and own the stock ahead of the next bull market, whenever it does come.
