Technology is transforming business at a breakneck speed, and many organizations are scrambling to keep up. There are two particular trends that separate the industry leaders from their competitors:
- cloud computing and
- big data.
Organizations that leverage both are better able to maximize productivity and minimize expenses, all the while exceeding customer expectations.
New types of tech companies like DataDog (DDOG) are focused on developing solutions for the novel challenges created by this transformation. Investors have been excited to be a part of this progress, and they are pushing tech stock prices up. But is that growth sustainable? How risky are tech stocks? Is DataDog stock a buy?
What Is Cloud Computing?
Cloud computing takes the pain out of technology. Instead of massive on-site data centers and costly software installation and maintenance, businesses can access computing services via the internet on an as-needed basis.
Businesses typically pay for what they use, and scaling up or down can be done almost instantaneously.
That adds convenience, flexibility, and cost savings, which all contribute to bottom-line results.
What Is Big Data?
Big data is a term that refers to the collection and analysis of the endless data points generated as companies go about their business.
Customer details and behaviors are just the beginning – data collection often includes internal information from workflow as well.
However, collecting and storing huge amounts of data isn’t useful if companies can’t organize and analyze it to gain insights.
Fortunately, there are new tools that automate comprehensive data analysis, and cloud computing provides the power for those tools.
What Does DataDog Do?
The challenge most organizations face when they transition to cloud computing and add big data to their strategies is monitoring all of those systems and related information. That’s where DataDog comes in.
DataDog was founded with a singular goal: to simplify the process of monitoring IT infrastructure and cloud services such as databases, tools, and servers.
Since its September 2019 IPO, DataDog has seen strong growth and one success after another. That means stock prices have gone up steadily, gaining a total of nearly 300 percent in just two years.
Can that rate of growth be sustained, or will DataDog stock plateau? In other words, is DataDog stock a buy?
DataDog Q2 2021 Earnings
In early August 2021, DataDog announced its second-quarter 2021 results, and investors were pleasantly surprised.
Share prices increased based on reports that revenue was up 67 percent year-over-year for a total of $233.5 million. That beat analysts’ expectations of $212.5 million for the quarter.
The steady increase in revenue is due, in part, to DataDog’s success in attracting lucrative new clients. As of June 30, 2021, the company reported that clients with annual recurring revenue (ARR) of $100,000 or more numbered 1,610.
On the same date the previous year, clients in that category came in at 1,015. The difference is an increase of 59 percent, which is important because these clients make up 80 percent of DataDog’s own ARR.
Non-GAAP net income per diluted share came in at $0.09, up from $0.05 the previous year. Analysts had expected just $0.03 per share. GAAP net loss per diluted share was $(0.03).
DataDog reported operating cash flow of $51.7 million and free cash flow of $42.3 million – both indicators that the business is moving along at a steady clip. However, this progress pales in comparison to the projections made by business leaders for the remainder of the year.
DataDog Reports an Innovative Quarter
Revenue wasn’t the only interesting news to come out of the second-quarter earnings call. When DataDog leadership recounted the innovations and product enhancements introduced in recent months, it was immediately clear why investors have been bullish on DataDog stock.
One of the most important product launches was DataDog’s Cloud Security Platform – a critical addition in a cyber environment that is becoming more dangerous for companies of every size.
The Cloud Security Platform allows clients to correlate security insights with monitoring data throughout IT infrastructure using a single platform.
That gives IT security professionals greater visibility into vulnerable areas, which means threats can be identified and mitigated more quickly.
What’s Next for DataDog?
Investors’ optimism about DataDog was spurred on by business leaders’ confidence. Among other good news, DataDog announced it was increasing its full-year guidance for both revenue and non-GAAP earnings.
Revenue for 2021 had previously been forecast to come in between $880 million and $890 million. Now, the forecast ranges from $938 million to $944 million.
With regard to non-GAAP earnings per share – DataDog had originally predicted the full year to come in between $0.13 and $0.16. The updated guidance calls for non-GAAP earnings per share between $0.26 and $0.28.
The DataDog Moat
There are plenty of up-and-coming entrepreneurs focused on surpassing DataDog’s success, and some of the tech giants – for example, Microsoft (MSFT), Amazon (AMZN), and Alphabet (GOOG) – want to do the same.
However, DataDog has a secret weapon to avoid customer churn: an exceptionally sticky ecosystem that is still expanding.
Not long ago, DataDog had a single tool, and clients signed on with the company because it was the only source for single-platform monitoring. Today, DataDog has ten popular tools, and a majority of its clients use two or more of them.
As clients integrate more DataDog tools into their business, it’s harder for them to justify an expensive, disruptive switch to competitors’ products – if they even exist. That sort of moat is difficult to come by, which makes DataDog stock more attractive.
Should I Buy DataDog Stock?
The biggest risk for those interested in buying DataDog stock today is the possibility of paying too much.
DataDog’s potential is baked into current share prices, and they are priced appropriately based on the company’s growth projections. Does that mean DataDog stock is overvalued?
The answer to that question is very likely yes for one simple reason. If anything goes wrong – which it usually does – DataDog won’t hit its targets. That means, in a best-case scenario, that share prices could plateau for a long period, leaving investors in a holding pattern.
In a worst-case scenario, share prices could drop, putting investors in something of a conundrum.
Is DataDog Stock A Buy? The Bottom Line
With all of that said, is DataDog stock a good investment? Perhaps – depending on what’s in your portfolio already and how long you intend to hold your shares.
Tech stocks tend to move together based on outside factors, regardless of what is going on within the company. Too much exposure to tech, including DataDog, is unwise for investors who have low or moderate risk tolerance.
Investors interested in DataDog for its promising long-term potential can consider DataDog stock a buy. The short-term risk is primarily around the likelihood of temporary setbacks – not long-term results.
By all measures, DataDog is very likely to see substantial long-term gains, so for investors who plan to purchase and hold, DataDog stock is a buy.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.