Datadog NASDAQ: DDOG is one of the market’s most successful cloud monitoring companies. It caught the attention of billionaire money managers and hedge funds last quarter with Ken Griffin's Citadel Advisors, Overdeck and Siegel of Two Sigma, and Israel Englander's Millennium Management showing they all bought shares in their 13F filings. These institutions were seemingly attracted to Datadog for the company’s accelerating revenue growth, high gross and operating margins, falling SG&A costs, solid balance sheet, and great cash flow margins. Datadog recently had a solid Q1 that’s continuing its success story.
Datadog’s Q1 2022 Results
Datadog improved its financials from the top down in Q1. Notably, the company finished on $363M in revenue, representing an 83% increase YoY. Its GAAP operating income was $10.4M; the operating margin was 3%. As a cloud company, Datadog also had an unusually high amount of free cash flow for Q1 of $129.9 million. Its balance sheet stood at $1.7B worth of cash and short-term investments.
Some notable business highlights for the company are as follows. Datadog increased the number of customers on its books with an ARR of $100,000 or more by 60% YoY, ending at 2,250. Part of how its sales team did this is by increasing the average number of services its customers buy; 35% of its customers used 4 or more products while 12% of its customers used 6 or more products, with each group increasing YoY. Datadog also launched its application security monitoring service to help move these numbers higher.
Valuation and Future Guidance
Like virtually any other cloud stock, Datadog is currently trading for a steep discount compared to its previous valuations. While the stock is currently up 187.12% over five years, it is down 36.64% YTD. The start of Q1 is when many tech stocks were sold off, with institutional investors buying large sums of shares in some of these companies like Datadog at a bargain. Still, something must be noted about the firm’s underperformance, as it currently trades 42% below the MarketBeat consensus price target.
Despite the company trading significantly below the consensus of Wall Street, guidance was given as part of the company’s earnings that paint a positive rest of the year. Revenue is expected to be between $1.60B and $1.62B, up from $1.03B in 2021. Non-GAAP operating income is set to be between $240M and $260M, while its Non-GAAP net income per share is expected to be between $0.70 to $0.77.
Datadog has been in a downwards channel starting in the middle of January. The company's improvement in fundamentals has done nothing to reverse this trend save for some short-lived rallies. Looking at the charts for similar cloud stocks shows the same pattern. One explanation for this is that tech stocks were previously overvalued and have since been corrected to more realistic valuations. Another theory is that even exceptional tech stocks like Datadog are still too expensive for investors' tastes, as it currently trades at 28 times its sales. In either case, the sell-off has been indiscriminate for cloud stocks, as the average loss for these companies stands at -32% YTD.
Datadog is positioned for further losses. It most recently benefitted from a slight 1% bump in the NASDAQ that lifted most tech stocks along with it, but its technicals have a strong history of a downwards movement. Also, the momentum that has built over the last few days is beginning to taper off as can be seen in the flattening slope of the MACD line.
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