Datadog Stock Analysis
Chart done on hourly timeframe. Datadog shares are trading more than 50% above their 52 week lows thanks to the company’s ability to finally deliver positive net income in 2023. Although earnings are still minimal, they’re still a sign of competence from leadership at the company, proving that they’re managing their growing revenue appropriately. Last year’s revenue grew at a rate of 27% YoY to reach an annual total of 2.13B, significantly higher than their less than 1B in 2020; however the rate of revenue growth slowed down from an average of 66% in the previous three years. The slow down in revenue growth eclipsed their profitable quarter on their last earnings report, leading the stock to gap down, but has since stayed around the same range. Investors pay close attention to revenue trends in young software companies and generally have high expectations from them. Datadog met those expectations over and over again in previous years, but has now fallen into question after the rate of growth fell by more than 50% last year.
The stock’s range trading behavior could be explained by the mixed signals mentioned above. On one hand, their rate of growth slowed down, but on the other hand they’re finally profitable and have built a respectable balance sheet. Their performance going forward will rely on their ability to grow revenue at a faster rate while maintaining profitability, but profit margins need to increase significantly to adjust their price to earnings ratio of 300x+.
The company’s 40B valuation is also hard to justify considering they’re only bringing in an annual revenue of 2.13B. A popular way to measure a company’s valuation against its revenue is by multiplying their last full year’s revenue by 10 and seeing how it compares to their market cap, for DDOG’s case, they’re projected to make 20B in annual revenue in the next ten years, 50% less than their valuation. You typically want to invest in companies that are projected to surpass their current market cap in future revenues over the next decade so DDOG may be in for a correction unless they surprise investors with a large jump in revenue this year.