Datadog Shows Its Bite as Sales Remain Strong Despite Macro Pressures

Datadog Stock at a Glance

• Fair Value Estimate: $120
• Morningstar Rating: 4 stars
• Morningstar Uncertainty Rating: Very High
• Morningstar Economic Moat Rating: Narrow

Datadog Earnings Update

We are maintaining our $120 fair value estimate for narrow-moat Datadog DDOG after the firm kicked off fiscal 2023 with a strong showing, showcasing both revenue growth and profitability ahead of our estimates.

We believe that despite the near-term headwinds Datadog faces as customers optimize their spending on IT vendors, the firm stands to be a long-term winner in the observability space. We project that once the macro-related headwinds dissipate, there will be a strong bounce-back in customer demand as spending on public cloud providers ticks up.

Dataog Stock Attractive Even After Rally on Earnings

Despite Datadog shares being up more than 10% May 4 following the earnings report, we view Datadog as attractively priced for investors seeking long-term, high-quality SaaS exposure.

Datadog’s top line for the first quarter clocked in at $482 million, up 33% year over year and ahead of our estimate of $472 million. We were encouraged to see Datadog’s net revenue retention rate stay above 130%, indicating a willingness by its existing customers to spend additional dollars on Datadog’s solutions. Additionally, despite the near-term macro headwinds, the firm added 2,300 new customers over the quarter. We believe both sales motions (landing new customers and expanding existing ones) are currently dampened by heightened budget scrutiny as customers measure twice to cut once. We believe Datadog’s land-and-expand model stands to gain significantly as some of these customer concerns regarding the overall health of the economy are allayed. We project a sharp rebound in demand in calendar 2024 as the health of the global economy recovers.

On the profitability front, Datadog’s first-quarter adjusted margins came in at 18%, ahead of our estimate of 16% as the firm sought to tighten its own fiscal belt during a time when investors are increasingly focused on profitability. The firm’s adjusted EPS of $0.28 was above our estimate of $0.23.