Datadog (DDOG 4.95%) has had an impressive run so far this year, riding the broader-based recovery of technology stocks. Shares of the cloud monitoring specialist are up more than 22% so far this year, easily outperforming the 14% gains of the S&P 500. This is in stark contrast to its performance in 2022, when the stock slumped 59%.
Beyond the general market rebound, Datadog's expanding suite of cloud monitoring tools and its resilient financial results have helped drive the stock price higher. Furthermore, Datadog was able to generate consistent robust growth during the downturn, despite the worst economic conditions in more than a decade. This helped fuel investor confidence that the company is positioning itself for better days ahead.
What does this mean for those who missed out on Datadog's current rally? Are there additional gains on the horizon, or has the stock simply run too far too fast? Let's see what the data shows.
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What was weighing on Datadog stock?
Last year was certainly no picnic for Datadog shareholders. Even as the company continued to add to its strong customer base and improve its financial metrics, the stock took a beating. Even its impressive performance didn't shield it from the broader economic mayhem.
In the second quarter, Datadog's revenue grew 25% year over year (YOY) to $510 million. While that's enviable growth for any company, it pales in comparison to the 84% growth it generated in 2021 -- before the onset of the downturn.
However, there are signs that the bottom may be in. On the earnings call, CEO Olivier Pomel noted that even as customers "scrutinize costs ... these new trends, along with the tenor of our customer interactions are encouraging." This suggests that the worst may be behind us, and a broader economic recovery could drive even more impressive growth for Datadog.
What could drive Datadog stock higher?
The more robust business spending environment aside, there are other catalysts that could drive gains for Datadog stock.
One potential driver is the company's relentless cadence of new customer additions and expanding relationships with existing customers. Datadog reported a customer base of more than 26,000, an increase of 23% YOY -- but that tells just part of the story.
Customers spending $100,000 or more in annual recurring revenue (ARR) climbed to 2,990, up 24%, and now account for 85% of the company's ARR. In fact, the company landed a record number of deals during the quarter, which suggests the tide may be turning. Furthermore, this is an important metric for the company because of its "land and expand" strategy. Newer customers tend to spend more as they become more familiar with all the company has to offer.
This has helped drive Datadog's improving bottom line. While the company isn't yet profitable on the basis of generally accepted accounting principles, it continues to generate strong operating cash flow and free cash flow. This shows that its losses are the result of noncash items like depreciation and that consistent profitability is on the horizon.
Datadog's integrated data platform offers a suite of 19 cloud-based products for infrastructure and application monitoring, log management, digital experience monitoring, cloud security, and developer operations. These interconnected offerings continue to expand Datadog's total addressable market, which management estimates at $45 billion, climbing to $62 billion by 2026.
Furthermore, the company's top-notch solutions have earned rave reviews from customers and industry accolades continue to pour in. Datadog was named a leader in the 2023 Gartner Magic Quadrant for application monitoring and observability and acknowledged as a leader in the Forrester Wave report for artificial intelligence (AI) for IT operations, where it was ranked highest for product vision, market presence, sensory/telemetry collection and retention, and data insights and visualizations.
How to approach Datadog stock now
To be clear, Datadog won't appeal to every investor. The stock is currently selling for 14 times trailing-12-month sales and an only slightly better 11 times forward sales. Given its valuation, some price-sensitive investors will likely take a hard pass.
However, since the company's IPO just four years ago, Datadog has grown revenue by 627%, pushing its stock up 138% -- even in the middle of the worst downturn in more than a decade. Its solid track record suggests the stock is worthy of a premium. Furthermore, Wall Street expects Datadog to continue its double-digit revenue and earnings-per-share growth between now and 2024.
Given the company's large and expanding market opportunity and reliable track record of growth, Datadog's rebound could accelerate as the broader economy rebounds.
