When a stock makes a large one-day jump, many investors wonder if they've already missed the boat or if it's just the beginning of something bigger. That's where many Datadog (DDOG 4.95%) watchers find themselves after the stock's monstrous 28% rise the day after it reported earnings.
So, is it too late? Or do investors still have a chance at picking up shares of Datadog for a reasonable price? Let's find out.
The stock's been on a roller-coaster ride lately
It's probably smart to understand the context behind Datadog's jump before digging into the reasons why it happened. The stock has had a tremendous year -- up 40%, including the jump after earnings. However, it reached its 2023 peak in August at $116 per share and subsequently slumped to around $90 following its Q2 earnings report. The stock moved lower, to $80 per share, right before Q3 earnings announcement, after which it shot up to more than $100 per share.
What caused the Q2 decline in the first place? Full-year guidance cuts and missing Q3 expectations. Wall Street wasn't pleased that Datadog projected only $523 million in Q3 when it expected $533 million. But when Q3 results came around and blew expectations out of the water, the stock was primed to return to its previous pedestal.
In Q3, Datadog reported revenue of $548 million, up 25% year over year. Additionally, it raised its full-year outlook to $2.105 billion from $2.055 billion. With Datadog reversing the issues that caused the sell-off in the first place, it shouldn't be that much of a surprise that the stock rebounded as aggressively as it did.
Datadog will likely continue to grow for some time, thanks to its industry focus. Its products are centered around one thing: observability. Datadog's products make it easy to see inside a computer system, which may have multiple data streams and software feeding into each other. It can be hard to diagnose when something is wrong until it's too late, but with Datadog's products, monitoring these feeds is easy.
One area seeing strong growth is artificial intelligence (AI). Generative AI requires massive data streams to inform the program properly and give it the most up-to-date information possible. Ensuring that these data flows are working is critical, and Datadog sees this as a large opportunity. According to management, about 2.5% of the company's annual recurring revenue comes from AI customers, but it expects this to expand as larger companies adopt this technology.
While Datadog may have flipped the script with its results and has a strong upside thanks to its industry exposure, is the stock a buy after a 28% jump?
Expensive stock, bright future
Datadog isn't consistently profitable and posted only a $22.6 million profit thanks to interest income from its cash pile. As a result, the most appropriate valuation measure is the price-to-sales (P/S) multiple, which allows investors to understand how much they pay for each dollar of sales from a historical perspective.
Clearly, the best time to buy Datadog was a couple of weeks ago as 17 times sales isn't cheap.
DDOG PS Ratio data by YCharts
With the stock approaching its 2023 P/S ratio highs, there's no doubt that buying Datadog's stock today is an expensive proposition. But with the upside in Datadog's business, I won't be surprised if investors look back five years from now and see this as a bargain.
Sometimes you have to pay up to own top companies, and anchoring to a previous price point can cause investors to miss some of the biggest winners. I think investors should be aware of that bias with Datadog stock and not hold back from buying Datadog shares because of it.
