Datadog Rises 15% in a Month: Should Investors Buy the Stock?

In a notable surge over the past month, shares of Datadog DDOG have climbed an impressive 15%, outperforming the Zacks Computer and Technology sector’s rise of 4.8%, catching the attention of investors and market analysts alike. Datadog's core business model revolves around providing organizations with real-time insights into their cloud infrastructure and application performance. This cloud monitoring and analytics platform has been riding a wave of increased demand for its services as businesses continue to accelerate their digital transformation efforts in 2024.

The company has consistently expanded its portfolio with new features and capabilities, such as serverless monitoring, real user monitoring and security monitoring. This commitment to innovation helps Datadog stay relevant and address evolving customer needs. The firm also boasts an expansion in its customer base, with a particular emphasis on large enterprise clients. As of the second quarter of 2024, the company boasted 3,390 customers with an annual run rate (ARR) of $100,000 or more, representing a 13% year-over-year increase. These premium customers contributed significantly to Datadog's revenues, accounting for approximately 87% of the total ARR. 

The company's multi-product strategy has shown strong traction, with 83% of customers using two or more products and 49% utilizing four or more, highlighting successful cross-selling efforts. This growth in high-value accounts suggests that Datadog is successfully penetrating the lucrative enterprise market, which could provide a stable foundation for future revenue streams.

1-Month Performance

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DDOG's Strategic Alliances Propel Stock Growth

Datadog's recent stock performance has been significantly influenced by its strategic initiatives in artificial intelligence (AI) and machine learning (ML) and its robust integrations with major cloud platforms. The company's multi-cloud approach has positioned it as a crucial player in the increasingly complex cloud computing landscape, offering a unified monitoring solution that spans diverse environments.

At the heart of Datadog's strategy is its ability to provide comprehensive visibility across multi-cloud infrastructures. By integrating deeply with Amazon AMZN-owned Amazon Web Services (AWS), Alphabet GOOGL-owned Google Cloud and Microsoft MSFT Azure, Datadog enables organizations to monitor, analyze and optimize their entire cloud ecosystem from a single platform. This unified approach is particularly valuable as businesses increasingly adopt hybrid and multi-cloud strategies to enhance flexibility and avoid vendor lock-in.

Datadog's partnership with AWS stands out, given its status as an AWS Partner Network Advanced Technology Partner and its AWS Cloud Monitoring Competency certification. This collaboration ensures that Datadog's tools seamlessly integrate with AWS services, providing customers with deep insights into their AWS infrastructure. The availability of Datadog on the AWS Marketplace further simplifies adoption for AWS users, streamlining procurement and deployment processes.

Similarly, Datadog's integration with Google Cloud extends across a wide range of services, including Compute Engine, Kubernetes Engine and Cloud SQL. This comprehensive coverage allows customers to maintain visibility and control over their Google Cloud resources within the familiar Datadog interface.

The strategic partnership with Microsoft Azure is particularly noteworthy, focusing on enhancing observability and security for Azure customers. This collaboration not only improves monitoring capabilities for Azure services but also extends Datadog's security features to the Azure environment, offering a holistic view of cloud infrastructure security.

The company's recent financial results have also been encouraging. In its second quarter, Datadog reported year-over-year revenue growth of 26.9% to $611.25 million. For 2024, the company projects revenues between $2.62 billion and $2.63 billion, with non-GAAP earnings expected between $1.62 and $1.66 per share. The Zacks Consensus Estimate for 2024 revenues and earnings is pegged at $2.63 billion and $1.64 per share, respectively. This indicates a year-over-year improvement of 23.4% in the top line and 24.2% in the bottom line. The earnings estimate has moved north by a penny over the past 30 days.

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By aligning itself closely with industry leaders like Amazon, Google, and Microsoft, Datadog has established itself as an indispensable tool for businesses navigating the complexities of modern cloud architectures. This strategic positioning, combined with its innovative AI and ML capabilities, including the introduction of Bits AI and the Time Series Optimized Transformer for Observability (Toto) model, underscores Datadog's potential for continued growth in the evolving cloud monitoring and analytics market.

DDOG’s Competitive Landscape and Valuation

Datadog operates in a competitive observability and monitoring market, facing rivals such as New Relic, Dynatrace and Splunk. While Datadog has differentiated itself through its unified platform and multi-cloud integrations, its competitors also offer robust solutions and have established customer bases. Additionally, tech giants like Microsoft and Amazon have their own monitoring tools, potentially posing a threat to Datadog's market share.

Additionally, the company's valuation may be a concern for some investors, as the stock trades at a premium compared to the broader Zacks Internet - Software industry. As of the latest data, Datadog’s forward 12-month P/S ratio hovers around 14.24, reflecting investors' high growth expectations. This valuation is justified by Datadog's strong revenue growth, expanding customer base and increasing product adoption.

DDOG’s P/S F12M Ratio Depicts Stretched Valuation

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Conclusion

Datadog’s strategic partnerships, coupled with its robust product offerings, position the company for continued growth and success in the evolving cloud monitoring and analytics market despite fierce competition and high investor expectations.

Datadog's comprehensive observability solutions across diverse cloud environments align well with the growing trend of multi-cloud and hybrid cloud adoption, making the stock worth buying in the near term. DDOG stock currently carries a Zacks Rank #2 (Buy) and has a Growth Score of A, a combination that indicates a good investment opportunity, per the Zacks proprietary quantitative model.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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