Datadog Earnings: Early Signs of Demand Normalization Even as Macro Continues to Impact Results

We are lowering our fair value estimate for narrow-moat Datadog DDOG to $115 from $120 after the firm reported a mixed quarter with strong financial results more than offset by fiscal 2023 guidance below our expectations. While near-term macro headwinds continue to impact customer buying decisions, we were encouraged to hear management’s commentary on early signs of demand stabilization, based on buying behavior in July. It appears that the financial results, especially the weak sales guidance for the upcoming two quarters, left a lot lacking for investors with Datadog shares down double digits after the earnings report. We believe this selloff is overly punitive and that long-term investors have an opportunity to buy a high-quality SaaS name for a bargain.

Datadog’s top line for the second quarter came in at $509 million, up 25% year over year and slightly above our estimate and management’s prior guidance. Net revenue retention, a metric of spending from existing customers, was above 120% for the quarter, dipping below 130% for the first time. Management attributed this dip in retention to larger customers continuing to scrutinize IT spending amid macroeconomic uncertainty. We believe that once the ongoing cloud optimization efforts subside, Datadog’s net retention metric could again expand.

For full-year 2023, Datadog revised its prior sales guidance downward. The company now expects 2023 sales to be around $2.055 billion, down from its prior estimate of $2.09 billion, both at the midpoint of guidance. We attribute this revision to additional conservatism baked into management’s guide coupled with some of the macro pressures mentioned above. We believe that if macro headwinds dissipate, Datadog could provide upside to the sales guidance this year.

On the profitability front, however, management’s emphasis on operational discipline continues to bear fruit, with the firm raising its 2023 guidance to $395 million, up from its prior estimate of $350 million.