The S&P 500 (^GSPC 0.11%) is one of three major U.S. stock market indexes, though it is widely seen as the best gauge for U.S. equities because of its breadth. The index includes over 80% of domestic stocks by market capitalization.
The S&P 500 is usually updated quarterly on the third Friday of March, June, September, and December. But software company Datadog (DDOG 3.31%) was added to the index before the market opened on July 9. It replaced Juniper Networks, which was recently acquired by Hewlett Packard Enterprise.
Datadog stock has returned 300% since January 2020, but some Wall Street analysts see more gains on the horizon. Yun Kim at Loop Capital tops that list. His target price of $200 per share implies 31% upside from its current share price of $152. Read on to learn more.
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Stocks tend to increase following their inclusion in the S&P 500
In total, 160 companies were added to the S&P 500 over the last decade, meaning about a third of the index was replaced during that period. Those stocks increased by an average of 12.3% in the year following their inclusion. Put differently, history says Datadog stocks will advance about 12% in the next 12 months.
Why do stocks often increase after joining the S&P 500? The answer lies in the numerous investment products linked to the index. Funds that track the index must buy Datadog upon its inclusion to ensure their composition matches the benchmark, and that buying activity can lead to significant price appreciation in the short term.
That said, tailwinds related to inclusion in the S&P 500 are short-lived. How Datadog stock actually performs during the next year depends primarily on financial fundamentals like revenue and earnings. Also, sentiment plays a role in that some stocks command higher valuations than others because investors are particularly excited about those businesses.
NASDAQ: DDOG
Key Data Points
Datadog uses artificial intelligence to monitor critical IT infrastructure
Datadog sells observability software. Its platform includes about two dozen products that help businesses monitor the performance of critical IT infrastructure and applications. Its platform also includes an artificial intelligence (AI) engine called Watchdog, which uses machine learning to detect anomalies and surface proactive alerts.
Datadog has been ranked as a leader in several software markets. Consultancy Gartner recently recognized its technology leadership in observability software for the fourth straight year, and it recently named Datadog a leader in digital experience monitoring software for the first time. And earlier this year, Forrester Research recognized the company as a leader in AI for IT operations.
Datadog reported first-quarter financial results that beat estimates on the top and bottom lines. Customers increased 9% to 30,500 and the average existing customer spent about 10% more. In turn, revenue increased 25% to $762 million, but non-GAAP net income rose just 4% to $0.46 per diluted share as the company continued to expand its headcount and invest in product development.
Management raised its full-year guidance, but adjusted earnings are still forecast to decline 7% in 2025 as the company continues to grow its R&D and sales teams. Nevertheless, the company remains optimistic about future growth opportunities. "We continue to believe that adoption of AI will benefit Datadog in the long term," said CFO David Obstler on the earnings call.
Datadog shares have added 13% this month on news of the company's inclusion in the S&P 500, and the stock currently trades at 82 times adjusted earnings. That is an especially rich valuation for a company whose earnings are forecast to grow at 17% annually through 2027. Datadog beat the consensus estimate by an average of 13% in the last four quarters, but the stock would still be expensive even if that trend continues.
Indeed, Most Wall Street analysts think Datadog is slightly overvalued. The median 12-month target price of $140 per share implies 8% downside from its current share price of $152. Datadog should benefit as more companies depend on AI, so investors should keep the stock on their watch lists. But I would wait for a better entry point before buying shares.
