From online banking to streaming the latest shows, our society relies heavily on technology. Organizations depend so much on tech that these systems must run continuously without a hitch. Enter Datadog (DDOG 4.95%), a company specializing in monitoring tech infrastructure so issues are caught before they affect customers.
The importance of Datadog's products has grown as tech infrastructures become increasingly complex. Organizations now combine on-site computer networks, software tools, and other systems with cloud computing platforms operated by third parties. Datadog's monitoring capabilities can span these disparate systems, watching for signs of a technical issue and providing the tools to address problems quickly.
An indicator of how important Datadog's solutions have become to an organization is illustrated by a seven-figure deal the company secured with a U.S. government agency this year. Datadog's success resulted in a strong third-quarter earnings report, causing shares to surge nearly 30% on Nov. 7, the stock's best performance to date.
So, does it make sense to buy shares in Datadog? To answer that question, here's a look at the company to help assess whether Datadog is a good long-term investment.
Datadog's evolution
One factor contributing to Datadog's appeal as an investment is the company's ability to successfully evolve its business. Datadog began by offering monitoring services for tech infrastructure, but now, it's expanded into cybersecurity, artificial intelligence, and more.
The company's expansion into cybersecurity makes sense. A cyberattack would be one of the anomalies Datadog's monitoring can identify, so cybersecurity capabilities are a logical next step in the company's evolution.
Datadog's platform also incorporates artificial intelligence, although the use of AI by its customer base is developing since this area is ramping up. But this means AI products provide the potential for years of continued revenue growth as AI adoption rises.
Datadog's expansion efforts, coupled with a focus on supporting the rapid adoption of cloud computing infrastructure by businesses, fueled the company's revenue growth. In its third-quarter results, Datadog's revenue reached $547.5 million, representing 25% year-over-year growth. This is just the latest in a trend of continuously rising revenue, a testament to its success in growing its business.
Data by YCharts.
Datadog's financials
The company's revenue growth is expected to continue. Datadog forecasts 2023 revenue to reach $2.1 billion, a double-digit increase over 2022's $1.7 billion.
Along with rising revenue, the company possesses a solid balance sheet. Datadog exited Q3 with total assets of $3.5 billion, with $2.1 billion of that in marketable securities. Total liabilities were $1.7 billion.
Another sign of strong financials is Datadog's trend of free cash flow (FCF) growth. The company reached an FCF of $396.3 million through three quarters, which already exceeds 2022's full-year total of $353.5 million.
Moreover, the company was profitable in Q3, with a net income of $22.6 million. However, it's worth noting after three quarters, Datadog is at a net loss of $5.4 million. That's still a substantial improvement over the prior year's net loss of $21.1 million through three quarters.
As CFO David Obstler explained, "We've always been looking at the balance between maximizing the top-line growth with producing profit and are going to continue to operate on that, taking advantage of the long-term opportunities." So, investors should expect the company's net income to vacillate depending on company investments in any given quarter.
To buy or not to buy Datadog stock
Customer adoption metrics indicate the strength of Datadog's offerings. The company grew its customer base from around 22,000 in 2022 to 26,800 at the end of Q3. In addition, over 80% of clients were using two or more Datadog products, and nearly half used four or more in Q3. Customers using multiple Datadog products not only attest to the popularity of the company's offerings but also mean more revenue for Datadog.
The company generates sales through a software-as-a-service (SaaS) model where customers subscribe to Datadog's services. This allows the company to generate predictable recurring revenue.
These factors, along with rising revenue and financial strength, illustrate Datadog's success in growing its business. These are positive signs of Datadog's ability to continue growing over the long run, making Datadog shares a worthwhile investment.
