Datadog Is in the Doghouse, But This Dip Spells Opportunity

Key Points

• Datadog's share price slump is an opportunity to buy into a significant growth story with years left to play out.
• Cybersecurity growth is expected to sustain a high double-digit growth pace through the middle of the next decade.
• Analysts and institutions provide tailwinds for this market that suggest a double-digit rebound and fresh multi-year stock price highs will come by year's end. 

Datadog NASDAQ: DDOG is in the doghouse following its FQ4 2024 earnings release, but this pullback is an opportunity to buy a great stock at a discounted price. The pullback was caused by tepid guidance, but guidance is in the eye of the beholder. While slightly below the consensus forecasts reported by MarketBeat, the guidance is strong and points to growth and increasing shareholder value. 

The balance sheet highlights the impact of acquisition, R&D, and growth initiatives, but the net result is positive. Cash and equivalents are up, offsetting increased debt, with current and total assets up on cash and property. Liabilities are also up but less than assets, leaving equity at $2.7 billion and up nearly 35% from the prior year, which is expected to continue growing. The company remains in solid financial condition with total liabilities of only 1.15x equity and the balance sheet net cash. 

Datadog Fails to Impress With Its 2025 Guidance

Datadog had a solid 2024 and ended the year strongly. The Q4 revenue is up more than 25% compared to the prior year and outperformed consensus by more than 300 basis points. Strength was seen across the network, with notable performance in large clients. Large clients, those contributing more than $1 million in ARR, increased by 16.6% and was compounded by improved service penetration. 

The Q4 margin was also good. The expected margin contraction was less than forecasted, leaving the adjusted EPS up 11% year-over-year. That is 1600 bps above the forecasts, but the guidance overshadowed it. The company is guiding for another solid growth year, but the Q1 and full-year forecasts are light. The full-year earnings forecast is the weakest, with the high-end below analysts' consensus. However, the takeaway for investors is that the cash flow and earnings outlook are sufficient to sustain the robust balance sheet and growth outlook. Datadog is expected to maintain a mid-20% CAGR for the next seven years—the company’s high, 80x price multiple in 2025 falls to under 10x in this scenario, with the share price remaining the same. 

Institutions Provide Floor for DDOG Stock Price

The sell-side interest, including analysts and institutional activity, is bullish. The 33 analysts tracked by MarketBeat rate it a firm Moderate Buy, with 75% rating it at Buy or higher, providing a positive bias to the data. The price target, up 18% in twelve months, assumes an 18% upside for the stock and revisions lead to the high-end range. That puts this market near the $200 level, a price target set the day before the Q4 results were released. 

The institutional activity made a noteworthy change in 2025. After selling on balance in Q2, Q3, and Q4 2024, the group reverted to buying. The group not only reverted to buying, but the buying pace was robust in the first six weeks, netting $1.6 billion of shares or about 3.3% of the mid-February market cap. With this in play, it is unlikely that DDOG shares will fall significantly further because institutions are likely buying the dip in share prices. 

Datadog Pulls Back to Support Target

Datadog’s share price pulled back significantly following the release, about 10%, but is unlikely to fall much further. The move put the market at a critical support level that is more likely to produce a rebound than not. A move below the $132 level would be a bad sign and may indicate a market breakdown, which is unexpected, given the guidance and long-term forecasts. The question is how long DDOG shares will wallow at the new lows, and it could be weeks or months. The next significant visible catalyst, other than results from other cybersecurity companies, is the FQ1 release scheduled for mid-May.