Cloud computing is the essential technology that allows businesses to operate in the digital world. It powers their online applications, connects their employees around the globe, and hosts their online sales channels.
The cloud enables businesses of all sizes to reach a global audience, but it does come with technical challenges. Datadog (DDOG 3.31%) created a cloud monitoring platform that is increasingly essential for large organizations with complex digital infrastructure. Now, Datadog is using its expertise to expand into artificial intelligence (AI) on multiple fronts.
Here's why Datadog stock could be a valuable part of any investor's portfolio over the next decade.
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An essential tool for cloud networks -- and now AI developers
Estimates suggest 70% of U.S. consumers now shop online. In a physical store, it's easy to determine customer satisfaction because an attendant is present to interact with them, receive feedback, and rectify any concerns. In the online world, customers are a click away from visiting a competitor's website if they are unhappy, and their reasons won't always be clear.
Technical issues can be a factor. Consumers might leave an online store if it's loading slowly or experiencing a glitch -- and the business might not be aware of the issue until sales are already lost.
That's where Datadog comes in. It monitors that digital infrastructure around the clock and alerts management to problems the moment they arise, so they can be rectified before they impact the customer experience. Retail is just one use case. Datadog serves 27,300 customers in financial services, manufacturing, media, gaming, and other industries.
Now, the company has entered the world of AI. Last year, it launched Bits AI, a chatbot-style copilot embedded into the Datadog platform. Bits AI can rapidly diagnose issues and deliver incident summaries to staff members, saving them hours of manual investigative work. Plus, it can be prompted using natural language, so even non-technical staff within an organization can draw valuable insights from operational and customer data.
Datadog also launched a new monitoring tool last year for generative AI developers. When a developer is building a large language model (LLM), this new tool can help them track its performance, troubleshoot technical issues, and even monitor costs. This can speed up the time it takes to launch a customer-facing generative AI chatbot with accurate responses, for example.
Delivered record revenue in 2023 -- and a profit
Datadog delivered $589.6 million in revenue during the fourth quarter of 2023, up 26% from the same quarter in 2022. It capped off a strong 2023, with full-year revenue jumping 27% to a record-high $2.1 billion. Datadog's largest spending customers drove much of that growth.
Around 3,190 of Datadog's 27,300 customers were spending at least $100,000 annually. That was a 14.7% year-over-year increase, and they represent 86% of Datadog's total annual recurring revenue. There were also 396 customers spending at least $1 million per year, a 24.9% jump.
AI is also slowly becoming a factor in Datadog's results. Customers developing generative AI now represent 3% of the company's revenue, which increased from 2.5% just three months prior. Considering products like generative AI application monitoring and Bits AI were only launched in the second half of last year, uptake has been relatively swift, and it won't be long before Datadog's AI segment is a major revenue driver.
Finally, Datadog typically invests heavily in growth initiatives, even at the expense of profitability. However, the company eked out a small $48.5 million in net income (profit) in 2023, which was a positive swing from the $50.1 million net loss it delivered in 2022. In an environment where the cost of capital is high due to rising interest rates, investors tend to look favorably on companies that avoid burning cash.
NASDAQ: DDOG
Key Data Points
Why Datadog stock is a buy now
Datadog's forecast for 2024 points to another record year, with over $2.5 billion in revenue in the cards. While that would represent a modest deceleration in growth to 21%, the company expects to see a small uptick in operating income, which suggests it will continue to carefully manage costs. In other words, Datadog will sacrifice some growth in favor of generating more profit, which will lead to a more sustainable business over the long term.
Wall Street maintains a very bullish consensus on Datadog. The Wall Street Journal tracks 42 analysts covering the stock, and 23 of them have given it the highest possible buy rating. Five are in the overweight (bullish) camp, while 13 are neutral with a hold rating. Only one analyst has rated it underweight (bearish), but none of the analysts recommend selling.
It's worth pointing out that despite a 15% gain in 2024 already, Datadog stock still trades 31% below its all-time high, set during the tech frenzy of 2021. Investors attributed it an ambitious valuation back then, but the company has gone from strength to strength ever since. Not to mention that its entry into the AI space will expand its addressable market, so the stock has more potential to deliver long-term upside than ever before.
Depending which Wall Street forecast you rely upon, generative AI could add anywhere between $7 trillion and $200 trillion to the global economy in the coming decade. If Datadog's AI monitoring platform becomes as successful as its cloud monitoring platform, investors might be pleased they bought the stock today when they look back on this moment in 10 years.
