Cloud observability platform Datadog (NASDAQ:DDOG) has turned in a remarkably strong performance over the past year. Thanks in large part to improving fundamentals, the stock has shot up by almost 50% in the last 12 months.
Does this former Stan Druckenmiller favorite have the potential to continue delivering strong returns and potentially make millionaires of its shareholders?
Key Points
- Datadog’s revenue surged from $604M in 2020 to $2.4B in 2023, achieving net profitability with $164M in profits and continued enterprise customer expansion.
- Though near-term risks exist, Datadog is well-positioned to benefit from growing cloud and AI markets, with analysts forecasting strong long-term growth.
A Look at Datadog’s Booming Performance
Over the last several years, Datadog has turned in consistently strong revenue growth. In 2020, the company generated full-year revenues of $604 million. For the 12 months ending in Q2 of this year, that number has risen to about $2.4 billion.
Every quarter of Datadog’s public history has seen positive year-over-year revenue growth rates. Though those growth rates have slowed down since their peaks in 2020 and 2021, the company is still reliably turning in revenue growth of more than 25%.
Perhaps even more important for Datadog’s current shareholders is the fact that the company achieved net profitability for the first time in 2023.
Since then, profits have grown rapidly, and Datadog has generated a net income of about $164 million over the last 12 reported months.
For Q2, Datadog reported revenue of $645 million, a 27% improvement over the year-ago quarter. Crucially, the company also continued to acquire new enterprise-scale customers.
As of the end of Q2, Datadog had about 3,390 customers contributing $100,000 or more in annual recurring revenues. This was 400 more than the company reported in the year-ago quarter.
Another major initiative underway at Datadog is the use of the company’s observability tools to monitor and protect AI applications.
In Q2, the company made its AI observability tools available to its general customer base, allowing users to monitor applications powered by large language models. Given the increasing use of LLMs in software, Datadog hopes to become a go-to provider of cloud services for AI developers.
Of course, Datadog’s future returns hinge on its ability to continue growing both its revenues and its earnings. Luckily, the future looks quite bright for Datadog.
Over the next 3-5 years, analysts expect earnings per share to continue growing at a compounded annual rate of about 19%. Management also expects to see about $2.6 billion of revenue for the full year of 2024.
What About Valuation?
There is little doubt that Datadog is performing well as a business. Its drawback as an investment, however, comes in the form of its high valuation.
Shares of the company currently trade at 17.6x sales, about 76x earnings and over 300x cash flow.
At these multiples, Datadog will have no choice but to continue delivering very strong performance going forward to justify its pricing.
Where Do Analysts See Datadog Going Now?
Analyst forecasts for Datadog are very positive at the moment.
The stock’s median target price based on 44 standing analyst ratings is $150 per share.
If the stock achieves this price over the next 12 months, it will represent a gain of about 23.4% from the most recent close.
Additionally, about 90% of the analysts watching DDOG rate it as a Buy.
Will Reduced Spending Hurt DataDog?
One of Datadog’s major near-term risks is the fact that corporate spending growth on IT currently seems to be cooling.
This may seem odd in an ecosystem defined by an AI boom, but both businesses and consumers are increasingly struggling to find practical, day-to-day uses for AI that justify the hype behind the technology.
While Datadog will almost certainly continue to benefit from cloud investment, the company’s future growth could be slower than expected if the current AI enthusiasm doesn’t translate to more IT spending.
Despite the bullish outlook from Wall Street analysts, it’s also worth noting that many institutional investors seem to believe that DDOG shares are overvalued.
In the last 12 months, institutional investors have bought a little over $3 billion worth of Datadog but sold over $6.5 billion. Though institutional ownership of Datadog is still nearly 80%, the stark difference between buying and selling activity may suggest a slightly more apprehensive view of the stock than is reflected in analyst ratings.
So, Will Datadog Make Investors Millions?
Datadog is unlikely to turn investors into millionaires in the near-term but if growth projections comes to fruition, the stock has the potential to climb by leaps and bounds over the next decade.
On the bullish side for Datadog, the company is performing extremely well in terms of both revenue and net income growth.
It’s also worth noting that Datadog retains a reserve of cash and cash equivalents of about $3 billion, giving it an excellent financial cushion.
Given that long-term debt currently stands at only about $743 million, it appears that Datadog is in a strong financial position that will likely allow it to fully capitalize on the growth it’s producing.
The one real problem Datadog faces is its high multiples. The company appears to be riding a wave of tech enthusiasm, especially where its AI-focused tools are concerned. As such, there is a real possibility that the stock could prove overvalued if the company’s future performance falls short of the high expectations investors have set for it.
Right now, management is handling the company’s growth quite well. If growth flags in the future, though, shareholders could see the stock’s price correct to reflect somewhat more realistic expectations.
In spite of this, Datadog could still have a place for risk-tolerant investors who are bullish on the continued growth of cloud computing and AI.
Cloud growth, in particular, has the potential to give Datadog a steady tailwind. Total cloud market revenues could rise to as much as $2 trillion by the end of this decade.
While this projection assumes continued strong growth in AI applications, cloud spending will likely keep rising even if artificial intelligence doesn’t prove as significant as believed. With businesses having more of their tech assets in the cloud, observability tools like those provided by Datadog will likely become increasingly important.
At the end of the day, Datadog’s future returns appear unlikely to be as strong as what it has produced over the past year. If current technological trends continue, though, the business has the potential to continue delivering respectable returns over the long run.