Shares of Datadog (DDOG 4.95%) fell after the company released fourth-quarter 2023 results on Feb. 13. Wall Street wasn't satisfied with its outlook, which points toward a further deceleration in growth following a challenging 2023.

However, it looks like savvy investors have capitalized on the drop in Datadog stock as it quickly recovered the next day. Let's see why that could have been the case, and if the stock is worth buying right now.

Datadog's slowdown initially spooked investors

Datadog, which provides an observability and security platform that enables customers to track the performance of their cloud infrastructure and applications and manage their security, raised its 2023 outlook last year, citing robust demand for its offerings. Datadog's full-year revenue of $2.13 billion exceeded the higher end of its guidance range of $2.10 to $2.11 billion.

Additionally, Datadog reported non-GAAP earnings of $1.32 per share for the full year. Though that was a big improvement over its 2022 earnings of $0.80 per share, the number was significantly lower than the company's guidance of $1.52 per share to $1.54 per share in earnings for 2023.

The company finished 2023 with a 27% increase in revenue. However, its 2024 forecast of $2.56 billion in revenue points toward a year-over-year increase of around 20%, slightly lower than the consensus estimate of $2.59 billion. For a stock that's trading at more than 22 times sales, it is not surprising to see why investors pressed the panic button following Datadog's results.

Additionally, Datadog's earnings guidance of $1.38 per share to $1.44 per share points toward a slower jump in the company's bottom line in 2024 at the midpoint. Again, with the stock trading at a whopping 941 times trailing earnings, investors would have liked to see a much bigger jump in Datadog's earnings this year. Wall Street was predicting adjusted earnings of $1.77 per share.

Don't miss these positives

There may be a chance that Datadog has issued cautious guidance on purpose. Cost-cutting exercises by organizations last year meant that Datadog customers were reducing spending on its solutions. The company saw some of its large customers optimizing their spending again in the fourth quarter.

However, there was a silver lining as well. CFO David Obstler pointed out on the latest earnings conference call:

While we may still be in a cost-conscious environment overall, we believe that the higher intensity of optimization has dissipated, and clients are continuing to invest in new digital applications. For the first time in six quarters, our sequential ARR adds in Q4 were higher than in the year-ago quarter.

There were other positive takeaways as well. Datadog ended 2023 with 27,300 customers, up 18% from the prior year. Even better, the number of customers with an annualized revenue rate (ARR) of more than $1 million increased at a stronger pace of 25% from the year-ago quarter.

Meanwhile, Datadog also saw a jump in product adoption last quarter, with the number of customers using four or more of its products increasing to 47% from 42% in the same period last year. Additionally, 22% of Datadog's customers were using six or more of its products, compared to 18% a year ago.

All this explains why Datadog's remaining performance obligations (RPO) increased an impressive 74% year over year to $1.84 billion, outpacing its actual revenue growth. This metric measures the total value of future contracts that are yet to be fulfilled by Datadog, so the sharp jump in the RPO points toward a solid future revenue pipeline. Even better, Datadog says that it is witnessing "an increasing interest with our larger customers in multiyear commitments, which results in longer RPO duration in both total and current RPO."

As such, there is a possibility that Datadog's slowdown may be temporary, and the company could regain its mojo as customer spending picks up. Additionally, Datadog is scratching the surface of a huge addressable market that's expected to hit $62 billion in 2026, compared to $45 billion last year. That's why investors probably bought the cloud stock on the dip, and such a strategy could bear fruit in the long run considering the impressive end-market opportunity Datadog could take advantage of.