Reality Sets In For High-Growth Datadog
Datadog (NASDAQ:DDOG) is by far one of the biggest winners from the COVID-19 pandemic. The company only IPO'd a few months before and is situated strongly within a fast-growing industry. DataDog’s cloud-based services not only aid with security but also with migration to the cloud and saw a sustained uptick in demand because of it. The problem now is that great results aren’t good enough. The company’s expected 30% CAGR is well-priced into the market and there is another factor to be concerned with.
Analysts at JP Morgan downgraded Datadog to Neutral from Overweight just hours after the calendar 3Q earnings report citing two-quarters of decelerating growth. Along with it, they lowered the price target to $90 adding that high valuations are likely to normalize in the coming quarters. RBC echoed the sentiment in its commentary calling the revenue “a bit shy” of the market’s expectations.
Datadog Falls After Earnings Surprise
Datadog had an impressive quarter despite the market expectations for more. The company reported a 61% increase in YOY revenue that beat consensus by 700 basis points. Revenue of $154.68 million was driven by a 727 YOY increase in customers. The company has delivered more than $100K in ARR over the past twelve months from a total of 1,107 customers and growing.
“We are pleased with our strong results for the third quarter, which demonstrated continued high growth at scale.” said Olivier Pomel, co-founder and CEO of Datadog. “The pandemic has driven organizations globally and across industries to prioritize their digital operations like never before, further strengthening the cloud’s position as the IT architecture of choice. Datadog continues to be a trusted partner in enabling digital transformation and cloud migration.”
Both gross and operating margins grew over the past year and beat the market’s expectations. Gross margins expanded 300 basis points to 79% while operating margin came in at 9.0% and 840 basis points above consensus. The increase in margins carried through to the bottom line but the results are mixed. The GAAP EPS of -$0.05 missed the target by a penny but that is mitigated when adjusted. On an adjusted basis EPS came in at $0.05 and beat by $0.04.
Looking forward the company expects strength to continue but the guidance is consistent with revenue-growth deceleration. Fourth-quarter revenue is expected in the range of $162-$164 million or up 4.7% to 5% sequentially. On a YOY basis that is just over 43% compared to the 61% increased posted for the 3rd quarter.
Decelerating Growth Won’t Support This Valuation
The vaccine news from Pfizer (NYSE:PFE) has many pandemic-plays moving lower on the idea demand for their services and products will wane. In the case of Datadog that is unlikely, digital is the new normal and the cloud is where the action is. That does not, however, support the ridiculously high valuation the market has placed on the stock. Trading at over 500X its forward earnings for this year and next the market needs to see growth accelerating, not decelerating.
The good news is that, if you are not already holding this stock, sooner or later the value and the outlook will come back into alignment and the stock will become a buy. The 3Q news has shared down more than 10% but this may not be the bottom so be patient. The price action is yet to confirm support of any kind and the indicators are pointing lower. A break below the $80 looks very likely in the near-term, in that scenario a move to $75 or lower is possible.
