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Bull of the Day: Datadog (DDOG)

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Datadog ((DDOG - Free Report) ), a data analytics company that makes tools for monitoring infrastructure and application performance, surfaced back on my "buy radar" this month after we last took profits on the stock on the big move from $80 to $120.

Here's what I told my TAZR Trader group on June 11...

Portfolio is buying Datadog (DDOG - Free Report) .

I've been eyeing our re-entry here and things have lined up pretty decent...

1. Back to Zacks #1 Rank after earnings, despite a stock sell-off

2. Software/Cloud getting killed elsewhere with CRM, MDB, SNOW, and SQ still in penalty box

3. Chart stabilizing at $110 support

4. Baillie Gifford still big holders, only selling 3% of shares in Q1

5. Valuation back to reasonable at 13X sales growing at 21-22% and EPS growing 17%

6. Goldman note yesterday on DDOG's "clear AI vision" as described here...

Management indicated that the hyperscaler growth witnessed in the first quarter "is attributable to AI value largely accruing at the infrastructure layer as limited GPU capacity comes online for model training (where Datadog has less exposure)," analyst Kash Rangan wrote.

The Goldman analyst observed that management has plans to expand the company beyond model providers "as more use cases emerge and inferencing workloads grow," he added.

Rangan also tried to explain some commentary from Datadog CEO Olivier Pomel about how Gen-AI is expected to increase data quantity and complexity, noting that Pomel believes "Datadog's core applications (ITIM, APM, Logs) should capitalize on this durable tailwind. Further, with a new category of AI-enabled applications emerging, the CEO noted that new tooling will be required, which Datadog is investing against."

The Goldman analyst reiterated his $143 PT, which is the Street average, offering 26% upside potential.

Finding Footing Above $110 After the Quarter

After Datadog's May 8 earnings report, there was some concern about growth leveling off. Here's what the Wedbush analyst team, led by Dan Ives, wrote about the numbers which highlight Net New ARR added that was the highest in almost 2 years...

One of the data points that we and investors have been using to estimate DDOG revenues has been its correlation with AWS revenues. For the past few quarters, we have seen AWS Revenues and DDOG Revenues being in sync tracking similar growth trajectories and the “attach rate” (DDOG Revenues/ AWS Revenues) follow a predictable path.

That math had led us and others to estimate DDOG Revenues in FQ1’24 could be ~$620m+. But that correlation broke down this quarter and DDOG revenues came in lower than those expectations, and in-line with the “typical” beat of ~$20m. Even though broadly speaking longer-term growth in Cloud and AWS is a positive for DDOG, the company had been cautioning that AWS revenues and DDOG revenues are unlikely to be in perfect sync every single quarter.

Despite these concerns, more than a dozen Wall Street analysts raised their EPS estimates for this year, driving the Zacks Consensus up 8.5% from $1.42 to $1.54.

And next year saw a bump from $1.73 to $1.80. These boosts represent nearly 17% annual profit growth for this year and next.

The Wedbush team maintained their conservative $155 price target for DDOG. And they sound ready for upside surprises in the coming quarters. So while the stock drifts between $110 and $120, I think data-centric investors are getting good risk/reward on a AI future where hyperscale datacenters are one of the fastest growing segments of industrial real estate.

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