The technology sector is having a great year, with the Nasdaq Composite index up 30% so far. But it's still trading below its all-time high following a brutal sell-off in 2022, and so are most individual stocks in the sector. A challenging economy has hurt companies' ability to deliver the same levels of revenue growth they achieved a couple of years ago, which is pressuring their stock prices. But signs are emerging that the worst might be over.
Cloud monitoring specialist Datadog (DDOG 4.95%) just released its financial results for the third quarter (ended Sept. 30). They were far better than expected, and investors sent its stock surging 28% on the day.
While the stock remains 47% below its all-time high, the professional analysts tracked by The Wall Street Journal are overwhelmingly bullish on its prospects. Here's why investors should buy Datadog stock now.
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Datadog is an essential platform in the cloud-based corporate world
Many years ago, businesses would maintain physical server hardware on-premise to store their data, host their websites, and run their digital applications. Today, they rent that computing power from enormous centralized data centers instead, which are managed by tech giants like Amazon and Microsoft. It's a practice called cloud computing.
It's very cost-effective because those data centers operate at a scale that lowers prices for everyone. As a result, businesses are running absolutely everything in the cloud, including their sales channels, payment infrastructure, employee collaboration platforms, and data analytics. But it can be challenging to keep track of those digital applications, and that's where Datadog comes in.
The Datadog platform monitors cloud infrastructure around the clock, in real-time. Businesses are alerted immediately if there is an outage on their websites or sales channels, for example, even if it only affects a tiny number of users and would have otherwise been overlooked. The platform is trusted by 26,800 business customers to reduce their downtime and help prevent situations in which revenue could be lost.
Now, Datadog has entered the artificial intelligence (AI) space. In August, the company launched an observability and monitoring platform specifically for developers of large language models, which are used to power generative AI applications. It will help them troubleshoot their models and monitor usage, costs, and performance.
Datadog also launched a generative AI chatbot recently called Bits AI, which could be a game changer. It allows users to query data sets and gain intelligent insights using natural language instead of programming language, which means even non-technical employees within an organization can learn from their crucial data.
Datadog's revenue surged in Q3 as optimization trends eased
Businesses have grappled with a challenging economy over the last 18 months, so rather than investing money in expanding their cloud infrastructure, they have instead focused on optimizing what they already have. This has affected Datadog's growth, but CEO Olivier Pomel said there are signs this trend is moderating.
With that in mind, Datadog generated $548 million in revenue during the third quarter, which was a 25% increase year over year, and significantly above the company's forecast of $525 million. It prompted management to increase its full-year revenue guidance by $47 million (at the high end of the range), to $2.11 billion. That was music to investors' ears.
AI is a massive long-term opportunity, and Pomel said it accounted for 2.5% of the company's annual recurring revenue during the third quarter. That number seems small, but it was likely close to zero before the AI revolution kicked off earlier this year.
Customers dipping their toes into AI products and services is a sign that their focus is shifting back to increasing their cloud spending once again, rather than optimizing.
Datadog also delivered a big profitability result
Datadog also delivered a substantial beat at the bottom line. It generated $0.45 per share in adjusted earnings, which was 32% above what the company had forecast. Adjusted metrics exclude one-off and noncash expenses like stock-based compensation, so it often isn't considered true profitability by investors.
But here's the good news: Datadog also delivered a profit based on generally accepted accounting principles (GAAP) of $0.06 per share during the third quarter. While it was a modest result, it was a big swing from the $0.08-per-share loss in the year-ago quarter.
Wall Street is overwhelmingly bullish on Datadog stock
As already mentioned, investors reacted very positively to Datadog's latest results, although its stock remains 47% below its all-time high. But it probably won't stay that way for long. The Wall Street Journal tracks 39 analysts covering the stock, and 19 of them gave the stock the highest possible buy rating.
Six other analysts are in the overweight (bullish) camp, while 14 recommend holding. Not a single one recommends selling.
That's a very encouraging consensus, and I would expect more analysts to turn bullish in the coming weeks as they digest Datadog's strong third quarter. Plus, with AI now firmly in the company's sights, its appeal will likely grow to capture a broader variety of investors.
They might want to take this opportunity to add Datadog to their portfolios for the long run.
