Datadog: In the Doghouse or Pullback to the Buyzone?

Key Points

• Datadog slumped 10% on solid results, opening up a buy-the-dip opportunity.
• Analysts' responses are mixed, but their activity continues to lead the market and points to a new high. 
• Datadog is amid a classic Head & Shoulders Reversal that could lead to a sustained rally in the 2nd half. 

Datadog NASDAQ: DDOG shares are down hard following its Q1 release and may be in the doghouse. However, heightened expectations, tepid guidance, and the exit of long-time president Amit Agarwal are also at play, suggesting a knee-jerk reaction to the news and a buy-the-dip opportunity for investors. The technical setup is favorable despite the double-digit dip. The market has returned to a critical support target aligning with a Head & Shoulders Reversal Pattern formed in 2022 and 2023. If support is confirmed at this level, the odds are high that DDOG shares will trend higher over the next four to six quarters. 

Datadog Slumps on Solid Results and Outlook

Datadog had a solid quarter, outpacing the analyst's consensus on the top and bottom lines. The beats are significant because analysts have been raising their targets, but, as analysts at KeyBanc suggest, the whisper numbers are much higher due to the strength of tech and cloud services at Amazon NASDAQ: AMZN and Microsoft NASDAQ: MSFT. 

So, the $611 million in net revenue is up 27% from last year and outpaced the consensus by 320 basis points but was insufficient to catalyze a rally. Details of note include the growth of large customers; clients providing more than $100,000 in ARR rose 15% as the shift to the cloud continues. 

Margin is another strength area the market hoped would be better. The company widened its gross and operating margins, produced GAAP profits, FCF of $187 million, grew adjusted EPS by 91%, and outpaced the consensus reported by Marketbeat by 3000 basis points but was still unable to catalyze a rally because the guidance left something to be desired—even more strength. 

The guidance is good but has two faults. The first is that growth is slowing from the mid-to-high 20% range to the low 20% range. The second is that guidance, although ahead of consensus at the time of the report, was tepid and broadly aligns with expectations. The takeaway is that the outlook for the business and stock is unaltered. Only the market for the stock has been reset. As the exit of Amit Agarwal? A passing concern. He is instrumental to the business's success and will move on to a board position. He will stay on until the year's end to ensure a smooth transition. 

Regarding the business health. The balance sheet is in fine shape, with low leverage and ample cash and liquidity. Total cash and equivalents are more than $2 billion, putting the company in a net cash position with a leverage of 0.3X. DDOG is well-capitalized and able to invest in growth as it sees fit. 

Analysts Response is Mixed; Group Leads Market Higher

The analyst's response is mixed with one upgrade/price target increase and one reduction. The takeaway is that sentiment is firming with an upgrade to Outperform from Baird and the price target adjustments offsetting each other. Baird increased its target to $140, and Morgan Stanley cut it to $137; both are above the consensus, implying more than 22% upside with the shares near $112.50. 

Datadog Stock is at a Critical Turning Point

Datadog stock is sitting on a critical support target and at a turning point for the market. If the market confirms resistance at this level, the reversal is in play, and a rebound should occur soon. DDOG should trend higher in that scenario and may retest this year’s highs before the next trading year begins. If not, DDOG could fall below the $112 region, where it will be at risk of a deeper correction. If $112 is confirmed as resistance, a move to the $100 level is likely. 

Institutional activity will be a factor for this market. Institutions own about 80% of the stock and have been buying on balance in 2024. The activity is light compared to 2023 but reverses the trend and adds a tailwind that could strengthen now that share prices have been discounted.