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Valued at a market cap of almost $50 billion, shares of Datadog (NASDAQ: DDOG) were listed on the NASDAQ back in September 2019. Datadog’s IPO or initial public offering was priced at $27 and DDOG stock is now trading at $156. Despite its staggering gains, Datadog stock is also trading 20% below all-time highs.
Let’s see if this large-cap tech stock should be part of your portfolio right now.
An overview of Datadog
A company that provides monitoring and analytics platforms for developers and business users, Datadog also integrates and automates infrastructure monitoring, application performance monitoring, log management, and security monitoring. These products and services offer real-time observability of Datadog’s customer technology stack.
In addition, Datadog also provides user experience monitoring, network performance monitoring, cloud security, incident management, and shared features such as dashboard, analytics, and collaboration tools, among others.
The bull case for DDOG stock
Datadog increased sales by 70% year over year to $1.03 billion in 2021. While it reported a GAAP loss of $20.7 million, its adjusted profits more than doubled to $166.8 million in 2021. Further, Datadog also turned profitable on a GAAP basis in Q4.
It ended the last year with 2,010 customers that generated over $100,000 in annual recurring revenue, an increase of 63% year over year. Additionally, the number of customers who rake in more than $1 million in annual sales more than doubled to 214.
Datadog’s dollar-based NRR or net retention rate was above 130% for 18 consecutive quarters. This metric suggests existing customers spent an additional 30% on the Datadog platform in 2021.
The company attributes its robust retention rates to the land and expand strategy where customers are locked in with one or two products, allowing Datadog to cross-sell additional products.
At the end of Q4 of 2021, close to 80% of customers used at least two products, up from the year-ago figure of 72%. Further, 33% used over four products compared to 22% while 10% used six or more products, up from just 3% in Q4 of 2020.
What next for DDOG stock and investors?
In fiscal 2022, Datadog forecasts sales to grow between 47% and 49%. Comparatively, Wall Street forecasts sales to rise by 48.7% to $1.53 billion in 2022 and by 37% to $2.1 billion in 2023. Its adjusted earnings per share are also estimated to expand from $0.48 in 2021 to $0.85 in 2023.
Datadog expects gross margins to range in the high 70s due to favorable cloud hosting costs. While the company will remain unprofitable on a GAAP basis this year, its adjusted EBITDA is on track to rise by 11% to $209 million in the next four quarters.
The global cloud analytics market might expand at an annual rate of 21% through 2028. Moreover, Datadog’s net retention rate indicates it is well-positioned to grow sales at a higher rate compared to the broader market, even if the top-line decelerates going forward.
So, if Datadog can increase sales by 25% annually through 2028, its annual revenue will surpass $5 billion by the forecast period. Currently, DDOG stock is valued at a forward price to 2022 sales multiple of 32x and a price to earnings ratio of 305x which is extremely steep, making it vulnerable to a sell-off.
However, every major correction can be viewed as a buying opportunity as it's impossible to time the market. Datadog ended 2021 with a cash balance of $271 million and another $1.3 billion in marketable securities providing the company with enough liquidity and a manageable debt-to-equity multiple of 1.3x.
While Datadog stock is expensive, its growth estimates and high retention rates support its expensive valuation.
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