Datadog (NASDAQ:DDOG) just served up some Street-beating results. However, investors chose to punish Datadog because they didn’t appreciate the CEO’s honesty and the company’s realistic revenue guidance. Therefore, I am bullish on DDOG stock and expect a near-term recovery in the shares.
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Hailing from New York, Datadog provides a monitoring and security platform for cloud applications. Like many other tech stocks, DDOG stock has sailed higher this year – or at least, that was the case until the shares plunged today.
What’s going on? Did Datadog release a slew of terrible quarterly results? Actually, Datadog fared well in the second quarter, but the market chose to obsess over the company’s current-quarter sales outlook. With that in mind, I invite you to consider putting a dog in the race with a share position in DDOG stock.
Datadog’s Positive Earnings Surprises
Until today, Datadog seemed like a favored cloud company on Wall Street. In fact, not long ago, Datadog earned price target hikes from analysts at Wells Fargo (NYSE:WFC) (from $95 to $130), Wedbush ($90 to $120), and Stifel ($101 to $115).
It’s amazing, though, to see how quickly sentiment can change in the financial markets. The response to this morning’s second-quarter financial results has been drastic, with DDOG’s stock price currently down by over 16%.
This is a counterintuitive response, as Datadog beat Wall Street’s top and bottom-line forecasts. Specifically, Datadog’s Q2-2023 revenue of $509.5 million was up 25% year-over-year and surpassed the consensus estimate of $501.56 million. This revenue result also came in above Datadog’s prior guidance range of $498 million to $502 million.
So far, so good. Additionally, Datadog reported adjusted earnings of $0.36 per share, exceeding the consensus estimate of $0.28 per share. The company itself had only guided for earnings of $0.27 to $0.29 per share.
In other words, it’s reasonable to conclude that Datadog had a great quarter, financially speaking. Who would possibly object to this and choose to divest their DDOG shares now?
Datadog Ends Up in the Doghouse
In my view, Datadog ended up in Wall Street’s doghouse today because the company was too honest for its own good. That’s a commendable problem to have, and I expect the market to stop punishing Datadog for its honesty in the coming weeks.
Apparently, it’s an unforgivable sin nowadays for a company to acknowledge its challenges. In the case of Datadog, the company’s chief executive, Olivier Pomel, stated that his company continues to see “customers, particularly some larger spending customers, scrutinize costs and optimize their cloud and observability usage.”
Along with that, Pomel admitted that his company has observed “more pressure on cloud-native businesses than traditional enterprise customers.” Presumably, the CEO’s point is that softer spending from some large-scale customers might dent Datadog’s current-quarter revenue.
Speaking of current-quarter revenue, Datadog anticipates generating $521 million to $525 million, which is below the consensus forecast of $534 million. That, coupled with Pomel’s forthright commentary, are what precipitated the steep sell-off in DDOG stock today.
By now, you surely know what will probably come next — analyst downgrades and price target reductions of Datadog stock. For the moment, however, analysts are generally optimistic about the stock, so let’s dig into some vital stats now.
Is DDOG Stock a Buy, According to Analysts?
On TipRanks, DDOG comes in as a Strong Buy based on 15 Buys and three Hold ratings assigned by analysts in the past three months. The average Datadog stock price target is $117.81, implying 32.7% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell DDOG stock, the most accurate analyst covering the stock (on a one-year timeframe) is Yun Kim of Loop Capital Markets, with an average return of 61.28% per rating and an 85% success rate. Click on the image below to learn more.
Conclusion: Should You Consider DDOG Stock?
Datadog’s CEO decided to take an honest approach, and the market’s reaction has been overwhelmingly negative so far. This, however, means that Wall Street’s expectations will be reduced, and that’s a setup for a potential comeback.
Besides, the market seems to be ignoring Datadog’s impressive second-quarter results. Consequently, I’m leaning bullish on DDOG stock and feel that investors ought to consider it before the window of opportunity closes.
