Cloud observability and security platform provider Datadog (DDOG +6.12%) has underperformed the broader stock market in 2024, with shares of the company down 7% as of this writing, and it looks like things are set to go from bad to worse following the release of its first-quarter 2024 results on May 7.
Datadog stock plunged more than 11% after its earnings report, and that would seem surprising at first, considering that it handsomely beat Wall Street's expectations. What's more, Datadog's outlook was also ahead of expectations. However, it looks like the news of the company's President, Amit Agarwal, stepping down from his role by the end of 2024 may have weighed negatively on shares.
NASDAQ: DDOG
Key Data Points
Datadog says that Agarwal is expected to join the company's board of directors once he steps down from his position. But pressing the panic button thanks to this management transition seems overdone, especially considering the company's impressive results.
Let's take a closer look at Datadog's quarterly numbers and check why the drop seems like an opportunity for savvy investors to buy the stock.
Datadog's numbers were better than expectations
Datadog reported first-quarter revenue of $611 million, a nice jump of 27% from the year-ago period. Its earnings shot up an impressive 91% from the year-ago period to $0.44 per share in the previous quarter. Both readings easily crushed consensus expectations of $0.34 per share in earnings on revenue of $590 million thanks to the robust demand for the company's cloud platform that allows its customers to monitor and analyze their cloud infrastructure, services, and applications.
The company ended the first quarter with 28,000 customers, an increase of 10% from the year-ago period. More importantly, Datadog witnessed a solid jump in the number of large customers who have clocked an annualized revenue run-rate (ARR) of more than $100,000.
Datadog's ARR refers to "the annualized revenue run-rate of subscription agreements from all customers at a point in time." The company ended the quarter with 3,340 customers with an ARR of more than $100,000, an increase of 15% from the year-ago period. This solid growth can be attributed to the growing adoption of its services by customers.
For instance, 47% of Datadog's customers were using four or more products from the company at the end of the previous quarter, up from 43% in the same period last year. The number of customers using six or more products increased by four percentage points to 23%.
It is worth noting that Datadog has been able to win a bigger share of its customers' wallets at a time when some of its customers are more conscious about their spending. This has translated into a robust year-over-year increase of 52% in the company's remaining performance obligations to $1.73 billion. This metric refers to the total value of the company's future contracts that are yet to be fulfilled, so the faster growth in this metric, as compared to Datadog's actual revenue, points toward an improving revenue pipeline.
The upgraded guidance points toward better times
Datadog management pointed out on the latest earnings conference call that the cost-control measures implemented by management are reducing in intensity. This probably explains why the company's guidance was better than expected.
Datadog is forecasting $622 million in revenue in the current quarter at the midpoint of its guidance range, along with earnings of $0.35 per share. Analysts would have settled for $0.34 per share in earnings on revenue of $617 million. Even better, the company raised its full-year revenue guidance to a midpoint of $2.6 billion from the earlier estimate of $2.56 billion. Datadog has also bumped its earnings guidance to $1.54 per share from $1.41 per share earlier.
Also, as the following chart indicates, analysts have raised their earnings growth expectations.
DDOG EPS Estimates for Current Fiscal Year data by YCharts
Moreover, Datadog is currently sitting on a total addressable market of $21 billion in the cloud security market and $51 billion in the observability space. Both these niches are expected to clock double-digit annual growth through 2027, indicating that Datadog should be able to sustain healthy levels of revenue and earnings growth in the future.
All this explains why Datadog carries a median 12-month price target of $150 as per 43 analysts covering the stock, which points toward a 33% jump from current levels. That's why it would be a good idea for investors to buy this cloud stock while it is down as an improvement in customer spending and the company's increased earnings power can help Datadog regain its mojo and head higher.
