In this bear market down 59%, can Datadog recover in 2023?

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what happened

share of Datadog (Dog 1.26%)A vendor of cloud-based monitoring software, has fallen 59% since January 3, 2022, according to data from S&P Global Market Intelligence.

Datadog flew high during the pandemic, as cloud-based software-as-a-service (SaaS) stocks rocketed higher amid rapid digitization and a zero-interest-rate environment. However, the tide quickly turned against expensive growth stocks in 2022 With the Federal Reserve implementing aggressive interest rate hikes last year, Datadog was never able to truly make a comeback, as fears of rapid growth and a software slowdown persisted. stock

Yet down nearly 60%, has Datadog suffered enough, and can this rising software star make a comeback?

so what

Although Datadog’s stock continued to decline throughout the year, Datadog’s business Actually consistently delivering hard earned results. In fact, the company has missed revenue and earnings expectations in every earnings release year over year. Still, these positives were not enough to overcome macroeconomic fears.

Datadog’s cloud-first platform is clearly catching on with developers and IT departments, who use it to protect and monitor the performance of their cloud-based software applications. With cloud computing still in its infancy and software complexity only increasing, Datadog appears to have a long growth path ahead.

Last quarter, when many of its software peers reported slowdowns, Datadog maintained a very strong 61% growth figure and expanded gross margin by two percentage points over the prior-year quarter.

Another thing for Datadog is that unlike many other SaaS stocks, it actually operates very close to profit under generally accepted accounting principles (GAAP) — even with respect to stock-based compensation. That makes it a candidate for a potential bounce in 2023, while some of its nonprofit peers could have a tougher time, especially if interest rates stay high.

Overall, the questions about Datadog are not whether it has a competitive product or whether it has a growing customer base with high retention and loyalty; It has all that in spades. The question is really one of assessment.

Considering Datadog is still trading at a lofty 13 times sales, investors need to make a fair amount of assumptions about Datadog’s future growth and profitability to decide whether to buy it now. Furthermore, they will likely need to assess whether interest rates will rise soon. Unfortunately, as long as inflation remains high, it is difficult to get a handle on the appropriate discount rate to use for future earnings.

Interested investors should consider creating their own discounted cash flow models to plug in various assumptions around all of these variables.

what now

Datadog looks like it should be able to maintain high growth rates for a significant period of time. In my models — where I try to be conservative with interest rates, declining growth and gradual margin expansion — the stock looks fairly valued. That being said, it could be underestimated if we return to a lower-rate environment, or if Datadog surprises to the upside on my estimates of revenue or terminal profit margins.

There aren’t many unprofitable SaaS stocks I’d consider right now, but Datadog is one of them. If inflation comes down significantly and the Federal Reserve stops or even reverses its interest rate hikes, the stock could very well bounce back this year.

For young investors looking to invest in growth stocks, this could be an opportunity to start a position in this A-list software name. Older investors may want to look for more profitable investments in companies that pay dividends and buy back shares.

Billy Duberstein has no position in any of the stocks mentioned. His clients may own shares in the said company. The Motley Fool has locations and recommends Datadog. Motley Fool has a revealing policy.


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