Datadog Stock Forecast: Billionaire hedge fund managers live and breathe stocks, often allowing them to spot opportunities other investors would easily miss.
Two well-known fund managers, John Overdeck and Ron Baron, are currently buying up shares in software company Datadog (NASDAQ:DDOG).
Despite being down 38.6 percent YTD, Datadog is clearly worth a second look.
Datadog is a software company specializing in analytics and monitoring. The company’s AI system uses Big Data to identify and address malicious threats and performance issues in cloud applications. Because of its wide range of products, Datadog is relatively simple for businesses to integrate into their existing systems.
Why Are Billionaires Buying Datadog?
The most obvious and simplest reason for the billionaires’ interest in Datadog can be found in the company’s most recent earnings report. In Q2, Datadog revenues rose to $406.1 million, a 74 percent increase over the previous year. Despite this excellent revenue growth, the company did operate at a minor loss of $3.1 million.
Datadog’s cash position is also reasonably attractive. The company is currently sitting on $1.7 billion in cash and equivalents. Its free cash flow also grew to $60.2 million, making up the vast majority of its $73 million operating cash flow.
Overdeck and Baron are also likely buying Datadog in part because of its rapid user base growth. In the last year, Datadog has increased its customer count by 30 percent. It has simultaneously increased its average revenue per customer, leading to a strong growth trajectory.
Speaking of growth, Datadog is expected to turn in much better earnings results in the coming fiscal year. Analysts project EPS growth of 63.8 percent. Paired with cash flow growth of 23.1 percent, Datadog is poised to see its performance and, by extension, its stock price rise over the next 12 months.
Another reason Datadog could look attractive to seasoned investment professionals is the fact that the company has the early stages of a moat forming around it.
Datadog has distinguished itself by offering better performance monitoring than its peers and successfully predicting problems in applications before they arise.
As the market for monitoring and security analytics continues to grow, there’s a good chance that Datadog will emerge as a go-to solution for businesses.
A final point that seems to be driving at least Baron’s bullishness on Datadog is the company’s wide array of product offerings. In a Q1 investor letter, Baron Global Advantage highlighted the rollout of 13 new products in 2021, as well as the growing proportion of customers using several products together.
Noting the pace of technological development, Baron argued that rapid innovation put Datadog at a substantial advantage to other competing vendors.
Is Datadog a Good Investment?
Obviously, Datadog has a promising outlook as a company. Ongoing customer growth and strong projected improvements in earnings both support an argument for buying the stock.
As noted above, these factors almost certainly play into the decision of billionaire investors to hold stakes in the company. Combined with a growing competitive advantage, Datadog’s growth makes it a fundamentally attractive business.
Analyst forecasts are also quite optimistic for Datadog stock. Out of 25 analysts offering recommendations, 15 rate the stock as a buy. The lowest rating offered by any analyst, meanwhile, was a hold. 19 analysts also offered price forecasts for the stock.
The median 12-month target price for Datadog is $135, a 23.4 percent jump from the most recent price of $109.41. As such, it’s safe to say that analysts are broadly bullish on Datadog.
However, there are also some more bearish facts about Datadog that investors should be aware of before buying shares in the company. To begin with, Datadog is very likely overvalued, even after falling nearly 40 percent this year.
The stock currently trades at about 140 times its forward earnings and almost 550 times its cash flow. Even though both of these metrics are expected to increase markedly over this fiscal year, the price already appears to have the next several years of growth baked in. This leaves little room for the stock price to absorb even modest negative developments without dropping significantly.
Another concerning point is Datadog’s narrowing operating margin. From Q4 2021 to Q2 2022, Datadog’s operating margin shrank from 3 percent to -1 percent.
Management noted that ongoing investments in marketing and product development accounted for some of the reduction, but also admitted that the ending of remote work associated with the pandemic had affected its margin. It could take some time for margin to recover, potentially delaying investors’ returns.
Datadog Stock Forecast: Is It a Buy?
Finally, Datadog’s acquisition of large customers seems to be slowing. The number of customers generating $100,000 or more in revenue for Datadog shrank by 10 from Q1 to Q2. I
t’s important to note that there are still 54 percent more customers at this level than there were a year ago. However, if Datadog fails to acquire these larger customers again, it could have difficulty meeting the expectations implied in its rather high share prices.
Ultimately, Datadog is a company that has enormous growth potential but limited room for error. Overdeck and Baron clearly believe that management will continue to execute well and achieve growth that justifies Datadog’s share price.
Despite some challenges and potential valuation issues, Datadog stands out as a company that could have a very bright future ahead of it.
For investors who are reasonably risk-tolerant and looking for high-growth opportunities, Datadog could be worth taking a small position in. If the company continues on its current growth trajectory and meets analyst expectations, the returns could be substantial.
Otherwise, the high price of the stock relative to earnings and cash flows could cause it to lag. Within a well-balanced portfolio, though, Datadog could be a good option for chasing higher returns at a moderate but not unreasonable level of risk.
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