Will Wall Street’s enthusiasm for Datadog lead to big gains?

  • Datadog easily beat earnings and revenue views in its latest quarter
  • Wall Street expects strong profit growth for the full year and for 2023
  • Despite analysts’ optimism for the long term, enthusiasm was temporarily dampened as the company only guided in line with expectations

Cloud Monitoring Specialist Datadog (NASDAQ:DDOG) has been the subject of analyst enthusiasm lately — at least for the most part, according to data compiled by MarketBeat.

On Friday, Credit Suisse launched a hedge 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%. Additionally, middle-market investment bank Robert W. Baird opened coverage for the stock with an “outperform” rating and a target of $120.

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

The stock has lost ground since posting its second quarter on Aug. 4. The company reported earnings of $0.24 per share, up 167% from the year-ago quarter. That topped the consensus estimate of $0.14 per share, as MarketBeat Revenue Data To display.

Revenue came in at $406.14 million, easily beating the consensus estimate of $381.28 million. This is a 74% year-over-year increase.

The company has posted earnings growth between 80% and 300% over the past five quarters. Revenues have grown at high double-digit rates over the past eight quarters.

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

For the full year, Wall Street expects earnings of $0.80 per share, which would represent a 67% increase. This figure is expected to rise another 34% in 2023, to $1.07 per share.

So, with all this good news, why did the stock plummet?

Obviously, part of the answer is the same for the majority of stocks: worries about interest rates, inflation, recession and just a general market decline.

But in the case of Datadog, some company-specific news dismayed investors: the company’s guidance was only in line with expectations rather than exceeding opinion.

Datadog provided the following guidance for the third quarter:

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

For the full year, it provides:

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

For the full year, you can see how net profit has a chance to come in at the lower end of expectations, which analysts’ views would miss significantly.

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 bring to the bank, is that institutional ownership has soared over the past quarter.

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

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

Second, institutions do not buy and sell willy-nilly. Instead, they tend to accumulate positions over time when convinced by action. They also don’t tend to bail out in panic, although today’s algorithms often trigger selloffs when a price falls below predetermined 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 by value. He drags Salesforce (NYSE:CRM), SAP (NYSE: SAP), ServiceNow (NYSE: NOW), Snowflake (NYSE: SNOW), Business Day (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 relatively new company in growth mode and trusted by institutions, Datadog is a strong candidate on the watch list for the next uptrend in the market.

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