Investors Are Barking Up The Right Tree With Datadog

Key Points

• Datadog reports a solid Q1 and raises guidance sending shares skyward. 
• The news may end a downward trend in analysts' price targets and lead to a complete reversal. 
• Other cloud-security stocks may report similar strengths due to the digitization of global business. 

A sustained rally in Datadog NASDAQ: DDOG is yet to be seen, but the bottom is in for this market. After a year of downtrend driven by analysts' sentiment, the company is reporting better-than-expected numbers and guiding the market higher. This is not surprising given the strength reported by Checkpoint Software earlier in the week and may lead the entire group higher. The least investors should expect is sideways, range-bound action, but a reversal is possible. 

The analysts have yet to develop new commentary, but you must assume they are updating their models. Details within the report show strong growth in sizeable corporate clientele and the company's ability to penetrate with new products and services. This should lead to a firming of the price target, if not a reversal in the trend, but that’s conjecture. Until then, the analysts rate the stock a Moderate Buy and see it trading flat to 40% above the current action. 

Datadog Has A Robust Quarter 

Datadog had a robust Q1 bringing in $482 million in net revenue. This is up 33% compared to last year and beat the Marketbeat.com consensus by 275 basis points on growth in large clients. The company reports a 30% increase in clients contributing at least $100,000 in ARR and margin well above expectations.

The adjusted operating income margin came in at 18%, resulting in a cash flow of $133 million and FCF of more than $116 million. The adjusted EPS came in at $0.28 and up $0.04 better than last year and $0.04 better than expected. This is 1400 bps above consensus and left the balance sheet in a good position despite increased spending. 

The guidance is equally impressive, calling for above-consensus growth for the year. The takeaway from the details is that Q2 will likely be as expected regarding the analysts' estimates, but business is expected to accelerate in the 2nd half. For the year, the company expects earnings to range between $1.13 and $1.20 compared to the consensus of $1.06, and this may be cautious.

The company shows momentum, and cloud services are a driving force. The global economy is still digitizing, and those already using the cloud continue to shift to next-generation technology. 

Datadog’s balance sheet is in good shape, and the company is set up to continue investing in new technology and advertising. The cash balance is down YOY, but cash and equivalents are more than $2 billion, and assets are up. The company’s debt is also up but not substantially, offset by an improvement in dilution. 

The Sellside Supports Datadog: Institutions Mark The Bottom

The analyst rate Datadog a Moderate Buy despite the downward trending price target, and the institutions agree. Their institutional activity has been bullish on balance for the last 12 months due to buying over the last 2 quarters. Their activity netted about $1.5 billion worth of shares which is about 7% of the current market cap and is coincidental with the bottom in share prices.

The stock hit bottom at the end of Q4 when institutional buying began to pick up, and the post-release pop in share prices confirmed that bottom. The stock will likely move higher soon, but the upside may be limited. It could become range bound if the market can’t get above the 150-day moving average and the $170 level.