This company has a strong history of growth and a long runway ahead.
The S&P 500 is generally viewed as the most thorough indicator of the U.S. stock market, consisting of 500 top publicly traded companies. Due to the broad scope of the businesses included in the index, it is celebrated as the most dependable benchmark for overall stock market performance. To qualify for inclusion in the S&P 500, a company must fulfill the following criteria:
- Be based in the U.S.
- Possess a market capitalization of at least $20.5 billion
- Exhibit high liquidity
- Have a minimum of 50% of its outstanding shares available for trading
- Show profitability according to GAAP in the most recent quarter
- Demonstrate aggregate profitability over the last four quarters
Datadog (DDOG 15.77%) is the newest member of the S&P 500, scheduled to join on July 9. It is one of only five companies to achieve this milestone this year. Since its initial public offering (IPO) in late 2019, Datadog has outperformed the market significantly, posting gains of 315% compared to just 109% for the S&P 500. This success is driven by impressive fundamentals, with revenue increasing by 694% and net income soaring by 2,670%.
Despite the impressive stock performance and the company’s solid growth record, many analysts believe that Datadog has plenty of growth potential ahead. Let’s explore the opportunities that exist and why Wall Street views the stock as a strong buy, even with its higher valuation.
Leading the Industry
The digital transformation is in full swing, fueled by increasing cloud adoption and the growing role of artificial intelligence (AI). Many businesses rely on their digital infrastructure and need effective solutions to continuously monitor their websites, applications, servers, and other cloud systems to ensure optimal performance.
This is where Datadog stands out. The company’s advanced monitoring and analytics platform oversees cloud-based business systems, processes millions of data points hourly, and alerts developers to issues before they escalate into significant downtime. Datadog’s SaaS tools provide deeper insights, addressing the root causes of issues to prevent future occurrences.
Impressive Financials
Datadog’s latest financial performance is compelling. In the first quarter, it reported revenue of $762 million, a year-on-year increase of 25%, resulting in adjusted earnings per share (EPS) of $0.46. Notably, the company’s free cash flow also rose to $244 million, representing a 30% increase.
Strong financial results reflect exceptional business execution. The customer base expanded to 30,500, a 9% rise, while customers contributing $100,000 or more in annual recurring revenue (ARR) increased by 13% to 3,770. Additionally, existing customers are broadening their engagements:
- 83% utilize two or more products, up from 82%.
- 51% are using four or more products, up from 47%.
- 28% are using six or more products, up from 23%.
- 13% are using eight or more products, up from 10%.
This land-and-expand strategy, along with the launch of new AI-focused products, suggests a promising future for Datadog.
Positive Analyst Outlook
Although Datadog downgraded its guidance earlier this year due to fluctuating tariffs, Wall Street remains optimistic. Out of the 46 analysts covering the stock in July, 38 have rated it as a buy or strong buy, eight have labeled it as a hold, and not one has recommended selling.
Loop Capital analysts are particularly bullish, maintaining a buy rating with a $200 price target, indicating a potential upside of 48% based on the current stock price. They highlight Datadog’s growth trajectory and an expanding total addressable market (TAM), projected to reach $175 billion by 2034, as key factors for their optimism. Furthermore, they anticipate Datadog’s free cash flow could rise to $7.9 billion over the next decade, showcasing the company’s long-term growth potential.
It’s important to note that Datadog has never been inexpensive. The stock is currently trading at 76 times next year’s earnings and 14 times next year’s sales. However, conventional valuation metrics can be misleading for high-growth companies, including Datadog. When assessed using the forward price/earnings-to-growth (PEG) ratio, it stands at 0.4, indicating undervaluation. Given its robust growth history, favorable industry trends, and bullish analyst ratings, Datadog appears to be a solid buy.
