Shares of software observability star Datadog (DDOG 4.95%) soared 43.1% in November, according to data from S&P Global Market Intelligence.
The company, which makes software that enables businesses to maintain and track the performance of all its software apps, reported earnings toward the end of the month that blew past expectations. Management also guided for strong growth in the current quarter.
In addition, a couple of lower-than-expected inflation reports helped bring interest rates down, aiding the fortunes of a high-growth technology stocks.
Datadog executes and hints at more strength
In its third quarter, Datadog outperformed analyst expectations, with third-quarter revenue surging 25% to $547.5 million and adjusted (non-GAAP) earnings per share of $0.45. Datadog also guided for revenue and adjusted earnings above the consensus for the current quarter.
Like many other cloud software companies, Datadog has seen a lot of customers seek to cut costs on their cloud bills over the past year. However, management's commentary on Datadog's earnings call appeared to encourage investors that the worst may be over:
We are seeing signs that the cloud optimization activity from some of our customers may be moderating. As a reminder, last quarter, we discussed a cohort of customers who began optimizing about a year ago, and we said that they appeared to stabilize their usage growth at the end of Q2. That trend has held for the past several months with that cohort's usage remaining stable throughout Q3. Overall, we continue to see the impact from optimization in our business, but we believe that the intensity and breadth of optimization we've experienced in recent quarters is moderating.
In addition, management noted a "healthy start" to the fourth quarter in October.
All in all, it was a positive report that the cost-cutting among cloud customers seen over the past year may be ending. Furthermore, Datadog looks like one of the winners of the new cohort of cloud software-as-a-service (SaaS) companies, as it is purpose-built in the cloud and taking share from other observability competitors that have had to adopt their pre-cloud technology from on-premises licenses.
In addition to earnings, Datadog also benefited when the October Consumer Price Index (CPI) and Producer Price Index (PPI) came in softer than expected. In that aftermath, the yield on long-term Treasury bonds came down from its October highs. And a lower long-term rate especially helps high-multiple stocks like Datadog, with the bulk of its profits out in the future.
Datadog stock is pricey, but high-quality
Datadog is definitely not cheap today after its November run, at a whopping 19 times sales. Still, it is likely to emerge as a winner of the digital transformation going on across global corporations, which now seems to be reaccelerating. So, it's a name for aggressive young growth investors to consider. Just note that the stock is highly valued, and therefore may be susceptible to big drawdowns at any slight disappointment.
