Datadog doesn’t belong in the doghouse

Datadog (NASDAQ: DDOG) shares are down more than 50% from their all-time high but it doesn’t deserve to be in the doghouse. The company’s valuation may have gotten out of hand back at the end of 2022 but now, with shares down at more reasonable levels, it’s more in line with reality and the reality is quite good.

Datadog had a robust quarter that bodes well not only for it but for other next-gen, cloud-focused, cyber security companies like Cloudflare (NYSE: NET) and Checkpoint Software (NASDAQ: CHKP) and even for blue chip security companies like Palo Alto Networks (NASDAQ: PANW) because it shows that demand is still strong. 

Datadog is doggedly delivering growth 

Datadog had a fantastic quarter in which the revenue hit $436.5 million which is up 61.4% on top of last year's near 75% growth. The only bad thing that can be said about it is that growth is slowing from 75% to 61.4% but there is a silver lining.

Last year’s 75% gain was worth $115.5 million in revenue while this year’s smaller percentage increase is a much larger (about 43%) dollar value so the law of large numbers is at play. The takeaway is that demand is strong across the company’s platform and it has just released 18 new features and products that should help drive growth and retention. 

Datadog threw the market a bone in the form of margin and earnings as well. On a GAAP basis, the gross margin widened by 200 basis points although the net loss widened. The caveat here is that losses are due to R&D and advertising which are costs that can be easily controlled and will lead to future sales.

So, on an adjusted basis the company reported a 17% cash flow margin and a 15.4% FCF margin which are solid results for this company. The adjusted $0.23 in EPS reverses a loss posted in the prior year and beat the Marketbeat.com consensus estimate by $0.07 or about 4400 basis points and the guidance is strong as well. 

The company issued guidance for Q4 and the full year that is favorable to share prices. The Q4 guidance is bracketing the consensus estimates with room to spare while the full-year targets are well above their consensus figures. Based on the obvious momentum, it is possible the guidance is cautious and outperformance will be the news in January 2023. 

The analysts trim targets, outlook robust 

The analysts have been trimming their targets in the wake of the Q3 report but the takeaway from their activity is nothing but bullish. The consensus sentiment of 27 analysts is a Moderate Buy and that is trending higher over the past year.

The consensus price target is down over the past 30 and 90-days but flat YOY and sitting about 75% above the recent price action.

The most recent targets, however, have the stock trading below that level but still within the range of $90 to $130 which is about 40% of upside if the stock hit the middle of the range. Assuming it continues to perform as it has been, that may happen in early 2023. 

The technical outlook: Datadog could be bottoming 

Datadog could be bottoming but it is too soon to go all-in with this stock. The last few weeks have produced some inside days that could lead to a bottom and reversal but that is a big maybe.

If so, there will be another chance to buy into this name at or near the $75.50 level if there is not a chance to buy in lower. Longer term, this stock should bottom and begin to move higher as it produces results.