Datadog (DDOG) provides a monitoring and analytics platform for developers, information technology operations teams, and business users, through a SaaS-based data analytics platform. The company was incorporated in 2010, and is headquartered in New York.
I am bearish on DDOG stock. The sales growth has not resulted in profitability yet and the valuation is very elevated. Shares of Datadog have gains of approximately 40% in the past year, outperforming the Nasdaq 100 and DDOG’s upcoming earnings will be a catalyst for a strong or weak performance in 2022.
Datadog Business News
On January 5, 2022, Datadog “announced a global strategic partnership with Amazon Web Services, Inc. (AWS). As part of this collaboration, AWS and Datadog will work together to develop and deliver tighter product alignment in the future.”
In other recent news, the firm announced the “launch of Sensitive Data Scanner” which helps customers “with an easy solution to detect, classify and protect sensitive data found in their application logs, helping them comply with regulatory requirements (such as GDPR, HIPAA, CCPA), industry standards and business policies.”
In early November 2021, the technology company announced the acquisition of Ozcode, “a live debugging solution that provides code-level observability in production environments.”
With Ozcode’s live debugging solution, customers can easily solve problems met during production by identifying issues and addressing them effectively.
Q3 2021 Financial Results
DDOG stock earnings can either provide excitement or skepticism depending on whether you monitor normalized or GAAP EPS.
GAAP EPS of -$0.02 were a beat by $0.05, and revenue of $270.49 million was a beat by $22.67 million.
On a year-over-year basis, revenue increased 75%. GAAP operating loss was $4.9 million, while the GAAP operating margin was (2)%.
On the positive side, operating cash flow was $67.4 million, and free cash flow reported was $57.1 million. Cash, cash equivalents, restricted cash, and marketable securities were $1.5 billion as of September 30, 2021.The firm announced that it had 1,800 customers with annual recurring revenue of $100,000 or more, representing an increase of 66% year-over-year.
Furthermore, the full-year 2021 outlook reported an estimate of revenue in the range of $993 millionto $995 million.
If this estimate is materialized, then it would represent a growth of approximately 65% compared to FY 2020.
Fundamentals – Risks
One of the most positive factors about DDOG stock is its revenue growth. It has a three-year average growth of 81.6%. The firm is also generating positive free cash flows, with a cumulative figure of $163.2 million in the first nine months of 2021.
On the negative side, the stock has a Piotroski F-Score of 3, which is low, and most of the time implies poor business operations. The Altman Z-score of 23.14 is strong, however, the D/E ratio has risen too fast from 0.06 in FY 2019 to 0.66 in FY 2020. As per the latest quarter, it increased further to 0.82.
Despite solid sales growth, the company is unprofitable and is struggling to post a profit. Diluted EPS have been steadily negative, although in Q3 2021 the reported figure of ($0.02) could mean that net profitability may soon be achieved.
I am skeptical when analyzing the operating income and margin. They are both negative and that is a key reason of concern as the firm cannot post a profit realized from its business core operations.
Shareholders have been diluted in the past year, with total shares outstanding growing by 2.5%, which also does not support the intrinsic value of the stock.
Valuation
Compared to the Information Technology Sector, DDOG stock has a forward P/S ratio of 45.93, whereas the sector median value is 3.94.
The stock has a forward price-to-cash flow ratio of 236.02, much higher than the sector median value of 23.14. Overall, Datadog stock is relatively significantly overvalued.
Wall Street’s Take
Turning to Wall Street, Datadog has a Moderate Buy Consensus based on 12 Buys, three Holds, and one Sell assigned. The average Datadog price target of $207 represents 41.5% upside potential.
Datadog may be close to reaching profitability soon. That will be very positive for the stock. However, negative operating income, net losses, and a rich valuation are warning signs to be aware of.
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