Datadog, listed as DDOG on the stock exchange, witnessed a decline in its stock performance following the announcement of its fourth-quarter 2024 results on February 13. Despite surpassing expectations, a reduction in customer spending affected the company’s guidance adversely.
The shares of Datadog, known for its observability and security solutions for cloud applications, fell over 8%. This decline corresponds with the company’s forecast of a drop in earnings for the current year. Nonetheless, Datadog’s extensive addressable market may provide an opportunity to reclaim momentum over time.
Datadog concluded 2024 with a 26% increase in revenue, reaching $2.7 billion, and a 38% rise in earnings compared to the previous year. The company’s forecast of an 18% growth in revenue for the current year, accompanied by an anticipated shrinkage in earnings in the high single digits, caused concern among investors. On a recent earnings conference call, Datadog CFO David Obstler noted that customers are focusing on cost efficiency and value in their expenditures. Consequently, Datadog’s management has provided guidance aligning with observed trends, reflecting a conservative approach to these growth trends.
Additionally, Datadog plans to escalate spending in sales, marketing, and research and development during the year. This increase in operating expenses, projected to rise in the high 20s percent range year over year, is expected to negatively impact the company’s overall financial performance.
Despite these challenges, Datadog appears to have potential for exceeding its forecasts as the year progresses, thanks to its promising revenue pipeline. The company’s remaining performance obligations (RPOs) increased by 24% year over year, totaling $2.27 billion in the prior quarter. RPOs represent the total value of contracts that will be fulfilled in the future, and this growth indicates a potential for Datadog’s future expansion.
Improvements in the customer base and an increase in the number of large customers contribute to this positive outlook. Specifically, the customer count for Datadog increased by 10% in 2024, and the number of customers with annual recurring revenue of more than $100,000 grew by 13%. Customers continue to adopt more of Datadog’s solutions, despite the slowdown mentioned by the company.
Moreover, Datadog anticipates that the cloud observability and security markets will experience healthy double-digit annual growth through 2028. These markets were valued at a combined $79 billion last year, presenting a significant addressable opportunity for Datadog to explore further.
In terms of valuation, while Datadog’s solid customer base, substantial market opportunity, and enhanced customer spending indicate potential for recovery, the current valuation may deter some investors. The price-to-earnings and price-to-sales ratios suggest that purchasing Datadog stock at this point might not be advisable. However, if Datadog’s stock price continues to decline and reaches a more favorable valuation, it could become an attractive option, given its long-term growth prospects.
