Will Wall Street's Enthusiasm About Datadog Lead To Big Gains?

Key Points

• Datadog handily beat earnings and revenue views in its most recent quarter
• Wall Street expects strong earnings growth for the full year and for 2023
• Despite analyst optimism for the long term, enthusiasm was temporarily muted because the company only guided in line with expectations

Cloud monitoring specialist Datadog NASDAQ: DDOG has been the subject of analyst enthusiasm recently - at least for the most part, according to data compiled by MarketBeat.  

On Friday, Credit Suisse initiated coverage with an “outperform” rating. Earlier in the week, Moffett Nathanson analyst Sterling Auty opened coverage with a “buy” rating and a price target of $143, representing a potential upside of 51.31%. Also, middle-market investment bank Robert W. Baird opened coverage of the stock with a rating of “outperform” and a target of $120. 

The only outlier, in terms of new analyst coverage, was JPMorgan Chase, which began coverage with a rating of “neutral.” 

The stock has lost ground since reporting its second quarter on August 4. The company reported earnings of $0.24 per share, up 167% from the year-ago quarter. That exceeded the consensus estimate of $0.14 per share, as MarketBeat earnings data show. 

Revenue came in at $406.14 million, handily beating the consensus estimate of $381.28 million. That was a year-over-year increase of 74%. 

The company posted earnings growth between 80% and 300% in the past five quarters. Revenue grew at high double-digit rates in the past eight quarters. 

In the earnings release, Datadog highlighted several new service partnerships and upgrades. It also noted that it had about 2,420 customers with annual recurring revenue of $100,000 or more, an increase of 54% over the year-earlier quarter. 

For the full year, Wall Street anticipates a profit of $0.80 per share, which would be an increase of 67%. That’s seen rising another 34% in 2023, to $1.07 per share. 

So with all that good news, why did the stock go into a slump? 

Obviously, part of the answer is the same for the majority of stocks: Worries about interest rates, inflation, recession, and simply a broad-market downdraft. 

But in Datadog’s case, there was some company-specific news that dismayed investors: The company’s guidance was only in line with expectations rather than surpassing views. 

Datadog provided the following guidance for the third quarter:

• Revenue between $410 million and $414 million.
• Non-GAAP operating income is between $51 million and $55 million.
• Non-GAAP net income per share between $0.15 and $0.17

For the full year, it expects: 

• Revenue between $1.61 billion and $1.63 billion.
• Non-GAAP operating income is between $255 million and $275 million.
• Non-GAAP net income per share is between $0.74 and $0.81.

For the full year, you can see how net income has a chance of coming in at the lower end of expectations, which would significantly miss analyst views. 

Nonetheless, Wall Street obviously maintains confidence in the stock, given the optimistic consensus price target of $148.36, a potential upside of 67.26%. 

Another sign of optimism, and one that investors can often take to the bank: Institutional ownership soared in the most recent quarter. 

Institutions own 72% of the shares, which is a strong vote of confidence. Funds hold 52% of shares. More institutions have purchased shares than sold shares in the past 12 months. 

Why is institutional ownership important? First, investment banks, funds, insurance companies, university endowments, and other large owners have dedicated research teams to meticulously ferret out opportunities. 

Second, institutions don’t buy and sell willy-nilly. Instead, they tend to accumulate positions over time when they have conviction about a stock. They also don’t tend to bail out in a panic, although today’s algorithms often trigger sales when a price falls below pre-determined technical thresholds. 

Although it went public just three years ago, Datadog’s market cap of $28.30 billion puts it among the top enterprise software makers in terms of value. It trails Salesforce NYSE: CRM, SAP NYSE: SAP, ServiceNow NYSE: NOW, Snowflake NYSE: SNOW, Workday NASDAQ: WDAY, and Shopify NYSE: SHOP. There are dozens of industry peers with lower valuations, including some well-known names like Asana NYSE: ASAN and Twilio NYSE: TWLO. 

As a fairly new company that’s in growth mode and one that institutions have confidence in, Datadog is a good watchlist candidate for the next market uptrend.