The last few months have been drama-filled for Datadog and investors in DDOG stock.
Shares of the software maker plunged more than 17% on Aug. 8 due to a weak third-quarter outlook. Exactly three months later, on Nov. 8, DDOG stock skyrocketed more than 28% when the results of that very same quarter turned out better than expected.
Now, as Datadog tries to break out of a cup with handle that's endured for nearly a year, the question is whether Wall Street's view on the company's 2024 revenue growth is too rosy.
New York-based Datadog monitors applications running on cloud-computing platforms. Software companies and information-technology departments are the biggest buyers of its monitoring and analytics tools.
Datadog's software runs on Amazon.com's Amazon Web Services, Microsoft's Azure cloud platform and Alphabet's Google cloud services.
Companies Rein In Cloud Spending
Datadog revenue boomed 70% in 2021 and 63% in 2022 amid the Covid emergency. Companies prioritized "digital transformation" projects during the shift to remote work, along with a boom in e-commerce.
Starting in mid-2022, though, many companies dialed back on usage of cloud services. Wall Street often refers to it as "optimization" by these firms. In 2023, analysts see Datadog revenue climbing nearly 26%. Analyst estimates call for a further slowing in 2024, to 22.5% sales growth.
That's where customer trends come into play. In the third quarter, Datadog brought in roughly 65% of revenue from its existing customer base. The other 35% came from new customers.
In a bright spot, Datadog said the September quarter marked the second straight period where it closed a record number of new deals with more than $100,000 in annual contract commitments.
Another plus involved artificial intelligence. Both established tech companies as well as startups in the industry are launching generative AI pilot projects that build apps using large language models.
Datadog disclosed AI metrics for the first time with those third-quarter results for DDOG stock. Datadog said about 2.5% of annual recurring revenue came from generative AI companies using its cloud monitoring tools to keep their services up and running. In addition, Datadog says its generative AI customer base is growing rapidly.
Home-Grown Management
"There are a number of modern software companies that are developing tools in the AI stack and delivering software and services to clients," Datadog Chief Financial Officer David Obstler said at a recent RBC Capital conference. "And one of our expertise areas is in monitoring client-facing, modern development software. So it's always nice to have sectors where your product fit is really, really good."
Datadog Chief Executive Olivier Pomel and Chief Technology Officer Alexis Le-Quoc co-founded the company in 2010. Earlier, the two worked at Wireless Generation, which built data systems for schools. They're still at Datadog's helm.
"We are big fans of founder-led management teams that are aligned with shareholders (actual meaningful equity ownership) but do not have voting control," TD Cowen analyst Andrew Sherman said in a recent note to clients.
He added: "We also highlight the strong tenure of other executives, including CFO David Obstler (5+ years), Chief Operating Officer Adam Blitzer (2+ years), and Chief Revenue Officer Sean Walters (5+ years tenure, 1.5+ as CRO)."
Datadog initially displaced large legacy vendors such as IBM, privately held BMC Software and Broadcom's CA Associates with its cloud-based monitoring and analytics platform.
DDOG Stock: IPO In 2019
Datadog competes with, among others, Cisco Systems' App Dynamics unit, Dynatrace, New Relic and Splunk, which is being acquired by Cisco for $28 billion.
Datadog's initial public offering in September 2019 raised $648 million, with 24 million shares priced at 27. DDOG stock hit an all-time high of 199.68 in November 2021.
Shares swooned in 2022. But in 2023, Datadog stock has gained 48% after rebounding on the third-quarter report.
Datadog's Nov. 8 surge got help in part from a short squeeze after the upside surprise. Short sellers profit from stock declines by borrowing shares of companies they see as overvalued. They sell them, and buy them back at a lower price later.
Datadog Stock: Tech Rules The Client List
From its founding through today, tech companies have been Datadog's biggest customers, particularly enterprise software companies. Among its nontech clients, financial services firms are notable vertical businesses.
Datadog has told analysts that customer cloud spending optimization efforts have moderated, leading to better trends in October. Amazon and Microsoft also noted improving trends on their third-quarter earnings calls with analysts.
"We have a cloud-based consumption model. Our revenues are associated with monitoring cloud workloads," CFO Obstler said at the RBC Capital conference. "And that means that we're correlated broadly to the workloads that go through the hyperscalers as well as how clients use the platform and all the tools. And we've been for well over a year in a cost management environment (optimization)."
He added: "So we said on the earnings call that we're not declaring the end of this period. We think there'll still be optimization, always is, but that some of the most intense areas have abated."
Follow Reinhardt Krause on X, formerly called Twitter, @reinhardtk_tech for updates on artificial intelligence, cybersecurity and cloud computing.
