Share prices of observability and security software provider Datadog (DDOG +1.61%) have been on a tear over the past few months, gaining nearly 70% since Nov. 1. While the company's fourth-quarter report on Tuesday featured somewhat weak guidance, Wall Street continues to rally behind the stock.
Datadog received a slew of price target bumps on Wednesday, with the most optimistic view coming from analysts at Loop Capital. Loop Capital maintained its "buy" rating on the stock and boosted its price target from $120 to $160 to reflect an acceleration in revenue growth in the fourth quarter. Other analysts cited improving consumption trends among Datadog's customers as a reason for optimism.
NASDAQ: DDOG
Key Data Points
Guidance was a bit of a letdown
Datadog grew revenue by 26% year over year in the fourth quarter, a modest improvement over the 25% year-over-year growth reported for the third quarter. The company scored some big customer wins during the quarter, with the number of customers paying at least $1 million annually jumping by 25%.
While Datadog's earnings report offered plenty of good news, the company's guidance was a bit lackluster. Datadog expects to generate revenue between $2.555 billion and $2.575 billion in 2024, which represents growth of about 20% at the midpoint. One analyst from Baird raised his price target because he sees the company's guidance as a case of Datadog being conservative and worried that a meaningful slowdown could put pressure on the stock.
Expectations are running high
Datadog traded for around $136 per share as of early Wednesday afternoon, so the $160 price target represents an upside of 18%. Datadog expects to produce adjusted earnings per share between $1.38 and $1.44 in 2024. Based on the midpoint of this guidance, the stock at $160 would sport a price-to-earnings ratio of 113.
That is an optimistic valuation, to say the least. The company produced adjusted EPS of $1.32 in 2023, so there will be minimal earnings growth this year if Datadog hits its guidance. For a price target of $160 to make sense, Datadog will need to accelerate its earnings growth and keep the bottom line moving higher for many years to come.
Datadog expects its total addressable market to reach $62 billion by 2026, so consistent double-digit growth is certainly doable. However, the sky-high valuation leaves little room for error.
