Today's decline in Datadog's share price is causing concern.
Datadog's shares are experiencing a downward trend during the afternoon trading session, dipping by 4.9% as of 2:30 p.m. ET. Concurrently, the S&P 500 and the Nasdaq Composite indexes are also recording losses of 0.9% and 1.2% respectively. Following the market close on the previous day, Stifel published a revised view on Datadog, decreasing their rating from 'Buy' to 'Hold' and revising their price target from $165 to $140, implying a potential drop of about 3.5%.
Datadog's Fortunes Take a Turn
Datadog has displayed an impressive 26% year-over-year revenue growth in Q3, reaching $690 million. However, Stifel analysts have raised concerns about the near-term momentum slowing down due to potential margin pressures. Furthermore, the analysts believe that Datadog is currently priced at its fair market value, indicating the risk of a potential downside in the quarters leading to Q4'25. Additional concerns stem from the potential for Q3 performance to set a high bar that may be difficult to surpass or exceed with subsequent financial reports.
What's on the Horizon for Datadog?
Datadog is set to release their Q4 earnings and host a conference call before the market opens on February 13. In line with their guidance, the company anticipates generating quarterly sales of between $709 million and $713 million. At the midpoint of the guidance range, this indicates a year-over-year sales growth of 20.5%. Meanwhile, non-GAAP (adjusted) earnings per diluted share is projected to fall in the range of $0.42 to $0.44, slightly lower than the $0.44 per share reported in the previous quarter.
The company may continue to benefit from AI-related demand tailwinds for its cloud monitoring and security platform. However, Datadog's stock price is contingent upon various factors such as the company's upcoming Q4 report, the budget constraints in the enterprise sector, and pricing pressures in the observability market. With a P/S ratio of 73 and a P/B ratio of 15, Datadog is trading at a premium valuation, making it sensitive to changes in market conditions.
The competitive landscape within the observability and monitoring market is relatively intense, with competitors including New Relic, Dynatrace, Splunk, Microsoft, and Amazon. Datadog maintains a competitive edge through its differentiated platform and multi-cloud integrations, but flagship rivals also offer robust solutions, posing a threat to the company's market share.
Sources:[1] TechTraders, 📉 Datadog (DDOG) Stock Price is Blue: Chart Analysis and Downside Risk [Website], n.d.[2] Seeking Alpha, Datadog Stock Forecast: Provides Cloud Monitoring And Application Performance Management Services [Website], n.d.[3] Seeking Alpha, Datadog Stock Price: Be Wary of OpenAI's Optimization Strategies [Website], n.d.[4] Zacks Investment Research, Datadog Earnings and Sale Guidance [Website], n.d.[5] Morgan Stanley Research, Datadog, Inc. - Overweight [Website], n.d.
Despite the market fluctuations and Stifel's downgraded rating, investors might still consider diversifying their portfolio by allocating some finance to Datadog, given its strong growth potential. After releasing their Q4 earnings, Datadog's future financial performances and market position will depend heavily on their ability to maintain their competitive edge, manage expenses, and navigate the observability market's challenging environment.
