Datadog Stock: Cash Flowing Tech Stock With 74% Growth, Net Cash

Dynamic sound wave. Blue energy flow concept. Cyberspace background. 3D rendering.

Vitalii Pasichnyk

Datadog (NASDAQ:DDOG) has historically been one of the clear leaders in the tech sector, and for good reason. The company has sustained rapid growth even as it laps tough comparables – all while generating robust cash flows. The company even has $1 billion of net cash on its balance sheet to top it all off. The tech crash has led to DDOG stock trading down to reasonable valuations, offering a compelling entry point for a stock geared directly to the growth of data. I rate DDOG a buy for long term investors.

DDOG Stock Price

After peaking just under $200 per share in late 2021, DDOG has fallen 57%.

Chart
Data by YCharts

I last covered DDOG in May where I discussed 4 questions to ask before buying the stock. The stock is down 12% since then, though the company continues to execute even in this difficult environment.

DDOG Stock Key Metrics

The latest quarter saw DDOG grow revenues by 74% to $406 million. The company had previously guided to $380 million.

revenue growth

2022 Q2 Presentation

On the conference call, management did state that they were seeing some impact from the macro-environment:

In Q2, while we overall saw strong customer growth dynamics, we have seen some variability in growth among our customers. We saw our larger spending customers continue to grow but at a rate that was lower than historical levels. This effect was more pronounced in certain industries, particularly in consumer discretionary, which includes e-commerce and food and delivery customers and affected more specifically our products with a strong volume based component such as log management and APM suite. Note that we did not see this with our SMB and lower spending customers who continued growing with us as they have in the past.

That said, I am doubtful that many investors are going to complain about 74% growth rates. DDOG grew its customer count by 29.3% to 21,200.

customers

2022 Q2 Presentation

The company also recorded at least a 130% net dollar retention rate for the twentieth straight quarter. I expect the company to continue generating strong retention rates considering that it still has more room to grow among customers using multiple products.

multiple products

2022 Q2 Presentation

DDOG saw GAAP profitability turn negative in the quarter but year to date has generated $4.9 million in GAAP net income. The company generated healthy non-GAAP operating margins and has been free cash flow for many quarters consecutively.

free cash flow

2022 Q2 Presentation

DDOG ended the quarter with $1.7 billion of cash versus $0.7 billion of debt.

Looking ahead, DDOG guided for the next quarter to see up to $414 million in revenue (implying 53% growth) and for the full year to see up to $1.63 billion in revenue (implying $447 million in fourth quarter revenue and 37.1% growth).

outlook

2022 Q2 Presentation

It is tempting to assume that DDOG will materially beat those numbers, but that outlook already implies healthy sequential growth rates. Investors should be prepared for growth to slow down considerably next year.

Is DDOG Stock A Buy, Sell, or Hold?

Consensus estimates indeed call for growth to slow down to 37% next year, though estimates are all over the place over the next few years.

consensus estimates

Seeking Alpha

With the stock trading at 17x this year’s sales estimates, the stock is not nearly as cheap as many other tech stocks. That premium is arguably warranted on account of the attractive secular growth story, strong profit margins, and history of outperforming estimates. I could see the company sustaining at least 30% net margins over the long term. Applying a 1.5x price to earnings growth ratio (‘PEG ratio’), I could see DDOG trading at 17x sales, implying a stock price of $119 per share or 37% potential upside over the next 12 months. This is a name which warrants a 2x to 2.5x PEG ratio in my opinion, implying further upside.

I caution that the strong profit margins and history of outperformance appear to be primary drivers of the premium valuation. If DDOG fails to live up to that track record, then the stock would likely crumble considering the ruthlessness of the current market environment. Many other tech stocks are trading at deeply distressed valuations, making DDOG’s rich premium a potential risk factor. Longer term, there is the risk that hyperscalers close the gap with DDOG and are able to better compete, leading to a saturated market. Even after the crash, one should still expect great volatility on account of the valuation. As I discussed with subscribers of Best of Breed Growth Stocks, a diversified basket of beaten down tech stocks may be the perfect strategy in the current environment. DDOG is a worthy addition to that basket as a high quality allocation, especially if one is of the view that it can continue beating estimates.

Be the first to comment

Leave a Reply

Your email address will not be published.


*