- Datadog easily beat earnings and revenue views in its most recent quarter
- Wall Street expects strong earnings growth for the full year and for 2023
- Despite analyst optimism for the long term, enthusiasm was temporarily muted as the company only guided according to expectations.
Cloud tracking specialist Datadog (NASDAQ: DDOG) has been the subject of analyst enthusiasm lately — at least for the most part, according to data compiled by MarketBeat.
On Friday, Credit Suisse initiated coverage with an “outperform” rating. Earlier in the week, Moffett Nathanson analyst Sterling Auty opened coverage with a “buy” rating and a price target of $143, representing a potential upside of 51.31%. Also, middle-market investment bank Robert W. Baird opened coverage of the stock with an “outperform” rating and a $120 target.
The only outlier, in terms of new analyst coverage, is JPMorgan Chase, which began coverage with a “neutral” rating.
The stock has lost ground since reporting its second quarter on August 4. The company reported earnings of $0.24 per share, up 167% from the previous quarter. That beat the consensus estimate of $0.14 per share, as MarketBeat earnings data out.
Revenue came in at $406.14 million, easily beating the consensus estimate of $381.28 million. That’s a year-over-year increase of 74%.
The company has posted revenue growth between 80% and 300% over the past five quarters. Revenue has grown at a high double-digit rate for the past eight quarters.
With the earnings release, Datadog highlighted several new service partnerships and upgrades. It also noted that it has about 2,420 customers with annual recurring revenue of $100,000 or more, an increase of 54% over the previous quarter.
For the full year, Wall Street expects a profit of $0.80 per share, which would be an increase of 67%. That is seen rising another 34% by 2023, to $1.07 per share.
So with all that good news, why did the stock fall?
Obviously, part of the answer is the same for most stocks: Concerns about interest rates, inflation, recession, and simply a broad market downdraft.
But in Datadog’s case, there was some company-specific news that disappointed investors: The company’s guidance was only in line with expectations rather than exceeding views.
Datadog provided the following guidance for the third quarter:
- Revenue between $410 million and $414 million.
- Non-GAAP operating income was between $51 million and $55 million.
- Non-GAAP net income per share between $0.15 and $0.17
For the whole year, it expects:
- Revenue between $1.61 billion and $1.63 billion.
- Non-GAAP operating income was between $255 million and $275 million.
- Non-GAAP net income per share was between $0.74 and $0.81.
For the full year, you can see how net income has a chance to come in at the lower end of expectations, significantly missing analyst views.
However, Wall Street clearly maintains confidence in the stock, given the optimistic consensus price target of $148.36, a potential upside of 67.26%.
Another sign of optimism, and one that bank investors tend to carry: Institutional ownership increased in the most recent quarter.
Institutions own 72% of the shares, which is a strong vote of confidence. The funds hold 52% of the shares. More institutions bought shares than sold shares in the last 12 months.
Why is institutional ownership important? First, investment banks, funds, insurance companies, university endowments, and other large owners have assigned research teams to carefully search for opportunities.
Second, institutions do not buy and sell randomly. Instead, they tend to accumulate positions over time when they have a conviction about a stock. They also don’t tend to bail out in a panic, although today’s algorithms often trigger sales when a price drops below predetermined technical thresholds.
Although it went public just three years ago, Datadog’s market cap of $28.30 billion puts it among the top enterprise software makers in terms of value. It walked Salesforce (NYSE: CRM), SAP (NYSE: SAP), ServiceNow (NYSE: NOW), Snowflake (NYSE: SNOW), Workday (NASDAQ: WDAY), and Shopify (NYSE: SHOP). There are dozens of peers in the industry with lower values, including some well-known names such as Asana (NYSE: ASAN) and Twilio (NYSE: TWLO).
As a relatively new company in growth mode and one that is trusted by institutions, Datadog is a good watchlist candidate for the next market uptrend. 
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