Datadog (DDOG) promises long-term returns in a booming cloud market

The cloud computing market is witnessing rapid growth across the globe, with enterprises shifting their businesses to digital platforms en masse to tide over the disruption caused by virus-induced movement restrictions. Riding the cloud migration wave, tech firm Datadog, Inc. (NASDAQ: DDOG) is busy strengthening its platform through various initiatives including strategic acquisitions. The New York-based cloud monitoring service provider had a positive start to fiscal 2021, serving more than 14,000 customers.

A Long-term Bet?

Currently, Datadog’s stock seems to be in the oversold zone, with relatively large volumes being transacted at prices that slipped below the $80-mark this month, after peaking a few weeks ago. But DDOG is returning to the growth path and is expected to gain as much as 43% this year. Prospective investors can consider buying and holding it for the long term while keeping a tab on the high valuation, in relation to earnings. It is not the right time to sell the stock.

Datadog went public in September 2019, nearly a decade after it was founded. Interestingly, the company managed to maintain profitability — often defying analysts’ negative outlook — even when the market entered a rough patch last year after being hit by the coronavirus. The management’s strategy of signing customers for a single service and then cross-selling additional services has been successful so far. Currently, the majority of customers use multiple products and the trend is expected to continue, given the stable demand for cloud monitoring services.

Mixed Sentiment

There was a 56% spike in fourth-quarter revenues to about $178 million, supported by a marked increase in the number of high-value customers. Consequently, adjusted earnings doubled to $0.06 per share from $0.03 per share last year. The numbers also surpassed analysts’ forecast, bringing cheer to the company’s shareholders. Meanwhile, the management’s weak guidance, which missed expectations, was a dampener as far as investor sentiment is concerned. The cautious outlook can be linked to the pressure on margins from costs associated with the integration of newly acquired assets and continuing investments in the business.

Read management/analysts’ comments on Datadog’s Q4 results

Datadog, which competes with the likes of Amazon (NASDAQ: AMZN), Splunk (NASDAQ: SPLK), and CrowdStrike (NASDAQ: CRWD), offers subscription-based services that allow customers to constantly monitor the performance of cloud-based applications and infrastructure. While aggressively expanding the portfolio, the company also acquired several tech firms in recent months, with the latest being application-security management platform Sqreen.

“We launched the general availability of Incident Management, which allows users to declare incidents, investigate the root cause and collaborate without leaving Datadog. And we also delivered more than 60 other new capabilities and features across our products, including new and enhanced integrations such as Snowflake, Oracle Cloud, or vulnerability analysis monitoring Snyk with our brand new Continuous Profiler,” said Datadog’s chief executive officer Olivier Pomel while interacting with analysts recently.

Stock Slips

The post-earnings rally proved to be short-lived in early February, with the shares withdrawing from the peak and slipping into a six-month low. Currently trading down 8% from the levels seen at the beginning of the year, the stock closed the last trading session at $83.34.