We came across a bearish thesis on Datadog, Inc. (DDOG) on The Wolf of Harcourt Street’s Substack by Wolf of Harcourt Street. In this article, we will summarize the bulls’ thesis on DDOG. DDOG Technologies, Inc. share was trading at $114.76 as of Sept 20th. DDOG’s trailing and forward P/E were 244.25 and 58.82 according to Yahoo Finance.
A close-up of a server running a cloud-native platform, symbolizing the power of the software-as-a-service (SaaS) business area.
Datadog provides a SaaS platform that integrates and automates infrastructure monitoring, application performance monitoring, log management, real-user monitoring, and many other capabilities to provide unified, real-time observability and security for their customers’ entire technology stack.
Datadog as Q2 of 2024 ended Datadog acquired 28,700 customers, reflecting a 10% year-over-year increase, although its growth rate has decelerated in recent years. Datadog’s Annual Recurring Revenue (ARR) continues to be heavily reliant on a small segment of high-value customers that contributed over $100K in ARR representing only 12% of the customer base but accounted for 87% of total ARR. The company’s successful ‘Land and Expand’ strategy has led to increased product adoption, with 83% of customers using multiple products. Noteworthy is the rise in customers using four or more products, now at 49%, and those utilizing six or more, which increased to 25%.
Datadog’s dollar-based net retention rate (DBNRR) remained stable in the mid-110% range for Q2 2024, indicating effective revenue generation from existing customers, who spent on average 10-15% more year-over-year. Revenue for the company grew by 27% year-over-year in the first half of 2024, surpassing previous figures, driven by heightened usage and penetration of core products, as well as growth in newer offerings like observability and cloud security.
On the profitability front, Datadog reported a modest GAAP operating profit of $13 million in Q2 2024, translating to a 2% margin, while its Non-GAAP operating income reached $158 million, equating to a 24% margin. The company’s investment in research and development (R&D) has grown considerably, now constituting 43% of revenue, underlining its commitment to innovation.
With revenues projected to grow to $5.12 billion in 2028 and considering a dilution rate of 9% over the forecast period, it is estimated that the intrinsic value of the stock is $79 per share which indicates that there is a downside of 28%.
Datadog, Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 79 hedge fund portfolios held DDOG at the end of the second quarter which was 77 in the previous quarter. While we acknowledge the risk and potential of DDOG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than DDOG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.