With a $25.83 billion market cap, Datadog, Inc. (DDOG) provides a monitoring and analytics platform for developers, IT operations teams, and business users in the cloud internationally. 

The company’s SaaS platform offers infrastructure monitoring, application performance monitoring, network performance monitoring, log management, cloud security, and incident management.

DDOG recently reported impressive fiscal 2022 first-quarter results. DDOG’s revenue increased 82.8% year-over-year to $363.03 million, while its non-GAAP gross margin rose 90.6% year-over-year to $291.74 million. 

The company’s non-GAAP net income and non-GAAP net income per share came in at $83.84 million and $0.24, registering an increase of 316.1% and 300%, respectively, from the prior-year period.

However, investors have been bearish about DDOG due to its sky-high valuations, and low stability (with a beta of 1.53), amid growing concerns about the Fed’s aggressive interest rate hikes and a possible recession. 

The stock has plummeted 54% in price year-to-date to close yesterday’s trading session at $81.99. Also, it has declined 38% over the past three months and 50% over the past six months. 

DDOG is currently trading 143.5% below its 52-week high of $199.68, which it hit on November 17, 2021.

Here’s what could shape DDOG’s performance in the near term:

Favorable Analyst Estimates

For the fiscal 2022 second quarter (ending June 2022), analysts expect DDOG’s EPS and revenue to grow 50% and 62.4% year-over-year to $0.15 and $379.27 million, respectively. 

The company’s EPS and revenue for the fiscal year 2022 (ending December 2022) are expected to come in at $0.74 and $1.62 billion, representing a rise of 54.2% and 56.3%, respectively, from the previous year. 

In addition, its EPS is expected to grow at 50.6% per annum over the next five years.

Mixed Profitability

DDOG’s trailing-12-month gross profit margin of 78.07% is 54.5% higher than the industry average of 50.53%. Its trailing-12-month levered FCF margin of 28.34% is 196.3% higher than industry averages of 9.56%.

However, DDOG’s trailing-12-month EBITDA margin of 2.20% is 83.5% lower than the 13.35% industry average. And its trailing-12-month net income margin of 0.17% is 96.8% lower than the 5.34% industry average. 

Its trailing-12-month ROE, ROTC, and ROA of 0.21%, 0.14%, and 0.08% compare with industry averages of 7.67%, 4.76%, and 3.01%, respectively. Moreover, its trailing-12-month asset turnover ratio of 0.53% is 16.5% lower than the industry average of 0.64%.

Stretched Valuation

In terms of forward non-GAAP P/E, DDOG is currently trading at 110.11x, 562.1% higher than the industry average of 16.63x. The stock’s forward EV/Sales multiple of 16.86 is 525.9% higher than the industry average of 2.69. 

In addition, its forward EV/EBITDA and Price/Sales ratios of 95.71 and 15.96 compare with industry averages of 11.67 and 2.54, respectively.

Also, in terms of forward Price/Cash Flow, DDOG is currently trading at 65.86x, 326.7% higher than the industry average of 15.43x.

Consensus Rating and Price Target Indicate Potential Upside

Of the 21 Wall Street analysts that rated DDOG, 18 rated it Buy, while three rated it Hold. The 12-month median price target of $163.58 indicates a 99.4% potential upside from yesterday’s closing price of $82.03. 

The price targets range from a low of $125.00 to a high of $223.00.

POWR Ratings Depict Uncertainty

DDOG has an overall rating of C, which translates to Neutral in our proprietary POWR Ratings system. The POWR Ratings are calculated considering 118 distinct factors, with each factor weighted to an optimal degree.

DDOG has a B grade for Sentiment, consistent with its positive revenue and earnings growth estimates. However, DDOG has a D grade for Value, in sync with its higher-than-industry valuation ratios.

Of the 56 stocks in the Software – Business industry, DDOG is ranked #30.

Beyond what I’ve stated above, view DDOG ratings for Growth, Stability, Momentum, and Quality here.

Bottom Line

Despite reporting promising latest quarterly results, shares of DDOG have been declining lately, owing to sky-high valuations and relatively low stability. 

Moreover, the stock is currently trading below its 50-day and 200-day moving averages of $109.72 and $144.15, respectively, indicating a downtrend. 

Due to the Fed’s hawkish tilt and an economic slowdown, the stock is expected to remain under pressure in the near term. Thus, investors should wait until the markets stabilize before investing in DDOG.

How Does Datadog (DDOG) Stack Up Against its Peers?

While DDOG has a C rating in our proprietary rating system, one might want to consider looking at its industry peers, Amdocs Ltd. (DOX), Software AG (STWRY), and Sapiens International Corporation N.V. (SPNS), which have an A (Strong Buy) rating.

DDOG shares closed at $85.63 on Friday, up $3.64 (+4.44%). Year-to-date, DDOG has declined -51.92%, versus a -22.73% rise in the benchmark S&P 500 index during the same period.

About the Author: Mangeet Kaur Bouns

Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions. More...

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