All eyes are on tech stocks this earnings season as many investors ponder how inflation and a potential recession will affect business spending. Datadog (Dog 1.41%)Popular and high-flying technology stocks are in the spotlight this week.
The Cloud Infrastructure Observatory will report on Thursday, August 4, before the market opens, and expectations are high. Wall Street expects revenue to reach $379.4 million this quarter, a 62 percent jump from last year.
That’s a pretty good prediction from Wall Street, but here’s why Datadog might meet — and possibly exceed — expectations.
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Tightening business budgets can weigh on Datadog.
Investors have been concerned for some time about technology’s performance in the second quarter. Fears of inflation and recession are weighing on businesses, causing many to curb spending. One of the ways these companies cut costs is to reduce the use of distributable software platforms.
Investors are especially concerned about high value companies. The higher the price, the higher the expectations for the business. If thriving companies aren’t living up to their optimism, look below. With 27 times sales, Datadog is almost covered for perfection.
Datadog is a software platform that allows businesses to track application performance. The company offers a subscription-based service, so, in theory, businesses can easily recoup how much they spend on Datadog each month. In reality, however, the likelihood of customer churn at Datadog is very low given how critical its services are.
Why Datadog Can Win.
Observability and application performance monitoring are essential to modern businesses, and Datadog is the top dog in the space. The company has more than 25 products to help businesses monitor their cloud infrastructure and keep their applications secure and efficient.
In short, the company provides essential products to businesses, and the company’s financials prove it. In the first quarter, Datadog’s retention rate was in the mid-to-low single-digit percentage range, and for the past 19 quarters, the company has had a net retention rate of more than 130 percent. Finally, 2,250 customers spent $100,000 or more annually on Datadog’s platform as of Q1, indicating how important its services are to many businesses.
Although companies could stop using Datadog in order to save some money, it seems unlikely. Even if the interest decreases in the short term, the long term text remains intact. The management believes that the observation market will be $53 billion by 2025. Even if the US enters a recession, the forecast may not change.
Also, Datadog could come out strong on the other side of the recession due to its impressive cash flow. In the trailing 12 months, the company generated more than $336 million in free cash flow. Relatively speaking, Dynatrace — one of Datadog’s primary competitors — generated just $233 million during the same period. If both companies see activity slow during the recession, Datadog may have more cash to continue investing in innovation to further grow its leadership, but Dynatrace will need to pull back on investment to protect its business.
Key metrics to watch on Thursday
While high customer churn is unlikely, Datadog can see customers pulling back. More Expenditure. Instead of spending 30% more than a year ago, customers can spend 20% more or maintain their usage year over year. So it will be important to monitor the net retention rate this quarter. The same goes for customers spending more than $100,000, another indicator of increasing customer spending.
Wall Street estimates set a high bar for 62% year-over-year revenue expansion, but Datadog is a high-quality business. For the past four quarters, the company has handily beaten Wall Street’s revenue estimates, and this quarter’s internal guidance puts Q2 revenue at $378 million — $1.4 million less than analysts were expecting.
Datadog’s products are considered by many to be business essentials, but this quarter puts that to the test. It’s safe to say that Datadog’s products will be extremely valuable if the company can drive revenue growth while seeing continued increases in consumer spending. That said, while the short-term is tough, the long-term future looks bright for Datadog. Regardless of its financial performance in Q2, you may want to consider owning the company’s shares.
