Datadog’s (NASDAQ: DDOG) Q2 results prove the resiliency of its business and why investors should take it out of the doghouse and put it back on their watchlists, if not their portfolios. The company outperformed in every metric, driving outperformance from the top to the bottom line, leading to improved guidance. The reason is simple. There is a great need for cybersecurity, and its zero-trust architecture and ease of use resonate with businesses.
Among the growth drivers is the penetration of services driven by the increasing number of available tools. Tools include secure operational environments for developers and engineers (including AI) and the Live Debugger, which helps developers jump right to where the code needs to be fixed. The takeaway is that Datadog, already growing and profiting, is transitioning from a cyber-security stock to a DevSecOps platform with a long runway for growth ahead of it.
Datadog Has Beat-and-Raise Quarter: Stock Price Surges
Datadog had a good quarter, with revenue rising 26.7% to $645 million. This aligns with the previous quarter’s growth pace and is an acceleration from the previous year that outpaced the consensus estimate by 320 basis points. Growth is driven by a 13% increase in large clients compounded by strong growth across all client sizes and deepening penetration.
The margin is another area of strength, providing value for investors. The company experienced margin pressure but less than expected, leaving the GAAP and adjusted earnings well above expectations. The GAAP EPS reversed losses in the prior year’s period, and the adjusted $0.43, which is up 20% YOY, outpaced the consensus by 2000 basis points. The takeaway is that operating cash flow came in at $164 million, a solid 25% of the revenue, with free cash flow running at 87% of cash flow, or $144 million.
The cash-flow positive quarter allowed for significant balance sheet improvements. The balance sheet highlights include a 20% increase in cash and equivalents, increased assets, decreased debt, steady liability, and a 20% gain in equity. Equity is running at roughly 54.5% of assets, a gain of 650 basis points and evidence of good and improving financial health.
Analysts Lead Datadog to Fresh Highs: Institutional Support is Iffy
The initial analyst response to Datadog’s results is light but aligns with the trends. The stock is pegged at a consensus Moderate Buy based on thirty-four analysts' recommendations. The number of recommendations is significant and shows a high conviction in the stock price target. The consensus target implies a 22% upside from $112; most fresh targets are above that level. The critical detail is that a move to the $138 consensus target aligns with the stop of DDOG’s trading range; a move above that level would break the market out of its range and open the door to a larger move.
Institutional activity will be important to monitor. The institutions own 78% of the stock and bought on balance in 2024, but the margin was slim, and net activity is dwindling to nearly nothing. If this trend continues, there may not be enough buying pressure to lift the market from its trading range. DDOG can move higher in that scenario, but the ceiling is near $138 and may remain in place until more inspiring news is available.
Datadog Confirms Higher Support, but Resistance Remains
Datadogs’ price action is mixed following the Q2 release, showing support at a higher level and resistance at a lower level. This suggests the market is winding up, with bulls and bears vying for dominance. If the bulls come out on top, this market will move up; the question is, by how much? Critical resistance is at a cluster of moving averages that could unleash a buying frenzy if crossed. The risk is that selling at these moving averages will continue to pressure the market and keep it sideways at the current levels. Datadog had a great quarter; it’s growing, accelerating and outperforming, but the valuation is still high enough to keep many investors away.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
