We recently published a list of the 7 Best Revenue Growth Stocks to Buy According to Analysts. In this article, we are going to take a look at where Datadog, Inc. (NASDAQ:DDOG) stands against the other best revenue growth stocks to buy according to analysts.
The Fed recently cut the funds rate by 50 basis points which has been considered a bold move by some analysts while others and most of the market have welcomed it with open arms. Moreover, over 50% of interest rate traders expect another 50 bps cut in the next meeting as well, according to the CME Fed-watch tool.
While the Fed’s move might seem risky, the broader market is up over 2.5% since the cuts, as of September 27.
Jeremy Siegel on the Fed’s Bold Move
In an interview with CNBC Squawk Box on September 19, Professor Jeremy Siegel of the Wharton School expressed his strong approval of the Fed’s decision to cut interest rates by 50 basis points. He called it the best news from the Fed in years.
Professor Siegel believes that this move will lead to a significant rise in the stock market and pointed out that the Fed is now addressing the gap between current rates and what he considers the “new neutral” Fed funds rate of 2.9%.
He said that the Fed has shifted from expecting only one rate cut by the year’s end to anticipating four cuts in total, with the market reflecting expectations of a gradual approach to future cuts.
When asked about concerns from former Fed Vice Chair Roger Ferguson, who warned that the market might be overreacting to the cuts, Siegel said that smaller, consistent rate decreases would be enough.
He suggested that if inflation remains low, the Fed could implement 25 basis point cuts in the upcoming meetings, ultimately reducing rates to around 3.3% to 3.5%. He said with confidence that inflation would not rise significantly, as he referenced the market indicators suggesting it could fall below 2% next year.
In a discussion about economic policies from the presidential candidates, Professor Siegel critiqued both sides as extreme and said that their policies are unlikely to be implemented. He said that there would be a divided government that would limit any drastic changes. He stressed that while some policies might be proposed, actual governance would lead to compromises rather than sweeping reforms.
Historical Insights on Rate Cuts and Stock Returns
According to data from Ned Davis Research, historical trends indicate that stocks tend to perform favorably in the year following the initial interest rate cut. According to the data, the broader market has recorded an average increase of around 12% in the first six months and 15% in the first twelve.
Despite the generally positive outlook for stocks following interest rate cuts, there were exceptions in 2001 and 2007, when the broader market saw declines of 12.4% and 22.2%, respectively, in the year following the Fed’s actions. This shows that historical average performance does not guarantee that rate cuts will always yield favorable outcomes.
However, looking at the last ten rate cut cycles since 1974, the market has risen in eight of those instances, with four cycles resulting in gains of over 20%. Additionally, after the 1974 cut cycle, the market reached a remarkable 40% increase.
Our Methodology
For this article, we used stock screeners to compile a list of over 30 stocks with 5-year revenue compound annual growth rate of 30% or above. Next, we narrowed our list to 7 stocks most favored by analysts. The 7 best revenue growth stocks are listed in ascending order of their average analyst price target upside as of September 27.
We also mentioned the hedge fund sentiment around each stock.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
Is Datadog, Inc. (NASDAQ:DDOG) One of the Best Revenue Growth Stocks to Buy According to Analysts?
Datadog, Inc. (NASDAQ:DDOG)
Average Price Target Upside: 31.35%
5-Year Revenue CAGR: 55.19%
Number of Hedge Fund Holders: 79
One of the best revenue growth stocks, Datadog, Inc. (NASDAQ:DDOG) runs an observability and security platform for cloud applications. It offers a suite of essential tools, including infrastructure monitoring, application performance monitoring (APM), log management, security monitoring, and digital experience monitoring. The solutions are essential for IT and DevOps teams striving to maintain reliable and efficient operations in increasingly complex environments.
In the first half of 2024, the company showed significant financial growth, with revenues rising nearly 27% year-over-year to reach $1.26 billion. The company also turned around its operating performance, reporting an operating income of $24.6 million compared to an operating loss of $57 million in the same period last year.
The improvement in financial health extended to net income, which climbed to $86.5 million, a stark contrast to the net loss of $28.1 million from a year prior. Additionally, free cash flow surged by 28% year-over-year, reaching $330.5 million, which shows the company’s ability to generate cash effectively.
To improve its service offerings and deepen customer loyalty, Datadog (NASDAQ:DDOG) has been proactive in launching new features. For example, the introduction of Data Jobs Monitoring allows data teams to detect job failures and optimize computing resources, ultimately leading to cost savings.
In June, the company also expanded its security product portfolio, which allows security teams to seamlessly access their code, cloud environments, and production applications. The additions improve the user experience and position the company as a go-to solution in a rapidly evolving market.
Management sees significant growth potential ahead, believing that the company currently holds just a 5% market share. With around 27,400 customers and a vast opportunity pool of over 530,000 potential global accounts, the market for cloud security solutions appears ripe for expansion.
The total addressable market for cloud security was estimated at approximately $21 billion in 2023, projected to grow at an annual rate of 16% through 2027. It suggests a favorable environment for continued growth as the company seeks to capture a larger share of this lucrative market.
43 analysts have given Datadog (NASDAQ:DDOG) a consensus Buy rating. The average price target of $150.00 has a 31.35% upside from the stock’s price on September 27.
Baron Opportunity Fund stated the following regarding Datadog, Inc. (NASDAQ:DDOG) in its Q2 2024 investor letter:
“In our view, the enterprise software winners will have to be better at delivering AI services and features than build-your-own AI tools, and they will have to use their incumbency or leadership advantages to ward off upstarts. We believe the winners will be the ones that have a well-established product development culture of innovation and iteration; differentiated proprietary, industry, and customer data; distribution advantages with large customer bases, successful go-to-market efforts, and key partners; well-designed workflows where AI improves the user interface, intelligent predictions/recommendations, and automation; and established always-on connectivity and feedback from their customers; among other things.
Here are a few examples of our software investments that we believe are AI winners: Datadog, Inc. (NASDAQ:DDOG), a cloud observability platform that the leading LLM providers are using today to monitor their AI apps; these AI customers are already driving nearly $100 million of annual recurring revenue for Datadog already.”
Overall, DDOG ranks 4th on our list of the best revenue growth stocks to buy according to analysts. While we acknowledge the potential of DDOG as an investment, our conviction lies in the belief that 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 is originally published at Insider Monkey.
