Datadog (DDOG 3.24%) finds itself increasingly popular with IT professionals. As a package that serves as a "dashboard" for cloud management, administrators increasingly take advantage of its benefits.
The same can't be said for its stock among investors.
Datadog's stock experienced underwhelming growth over the last year, and the 20% increase so far in 2023 lags numerous other growth tech stocks as well as the broader Nasdaq Composite.
Does that muted growth make it an overlooked buy, or is some caution warranted?
NASDAQ: DDOG
Key Data Points
What Datadog offers
IT executives Olivier Pomel and Alexis Lê-Quôc founded Datadog in 2010 and currently serve as CEO and CTO, respectively. They saw a need for a product to bridge the communications gap between developers and systems administrators.
That push manifested Datadog's "cloud monitoring as a service" product. Its software acts as the dashboard of the cloud, aggregating methods and events across a development operations stack. This provides clearer visibility to the functions of that stack.
Moreover, it has not allowed the artificial intelligence (AI) revolution to pass it by. In Q2, Datadog released a large language model (LLM) observability solution to monitor LLM stacks. It also announced Bits AI, a generative AI product to learn from customer observability data to help engineers.
The numbers speak to its increasing popularity. In the second quarter of 2023, 2,990 of its customers spent $100,000 or more annually on the platform, up from 2,420 in the year-ago quarter.
Existing customers also spent more on the platform, with the dollar-based net retention rate at over 120%. This means that longer-term customers spent 20% more on average with Datadog than one year ago.
Datadog's recent financials
Despite this optimism, Datadog is not immune to the recent cloud slowdown. In the year-ago quarter, it reported dollar-based net retention at 130%. Also, in the first six months of 2022, revenue had risen by 78% compared with the same period in 2021.
In comparison, Datadog brought in $991 million in revenue in the first half of 2023, a 29% surge year over year. While most investors would consider that a significant growth rate, it actually represents a dramatic slowdown.
Additionally, operating expenses increased by 40% during that period, indicating that Datadog is used to the faster growth rate of past years. As a result, the company lost $28 million in the first six months of 2023, down from a profit of $5 million in the year-ago quarter.
For 2023, it forecasts just over $2.05 billion in revenue. If that holds, that will amount to a 22% yearly increase, well below the 63% rise in the previous year.
But even with that improvement, the stock price is only up slightly over the last 12 months. Additionally, its stock price takes its price-to-sales (P/S) ratio to around 15. Although that may sound high, the sales multiple has returned to levels it experienced before the 2020 bull market began in earnest. Also, its rapid revenue growth could lower this ratio, which would serve as a further catalyst for Datadog.
Consider Datadog stock
At current levels, investors might want to consider adding shares of Datadog. It's true that revenue growth has slowed and the return to losses may discourage investors hoping for steady improvement. However, as cloud adoption increases, more customers are turning to Datadog.
Moreover, once customers see the benefits of Datadog, many continue to add services. This trend, along with a history of profitability, bodes well for an eventual return to growth.
