Datadog (NASDAQ: DDOG) stock experienced a setback following the release of the company's fourth-quarter 2024 results on Feb. 13, despite delivering better-than-expected numbers, as a slowdown in customer spending dented its guidance.
Shares of Datadog, which provides observability and security solutions for cloud applications, were down more than 8% as the company forecasts a decline in its earnings this year. However, its massive addressable market could allow it to regain its momentum once again in the long run. But is the stock attractive enough to buy right now following its recent pullback? Let's find out.
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Datadog's addressable opportunity suggests its growth could accelerate again
Datadog finished 2024 with a 26% increase in revenue to $2.7 billion, while its earnings shot up 38% from the prior year. So, the company's forecast that its revenue will increase at a slower pace of 18% this year, while earnings could shrink in the high single digits, was enough for investors to press the panic button.
On its latest earnings conference call, Datadog CFO David Obstler remarked that customers are "remaining cost conscious and seeking efficiency and value from their spend." This explains why Datadog management has issued guidance in line with "trends observed in recent months and appl[ied] conservatism on these growth trends."
Additionally, the company plans to ramp up spending both on sales and marketing and research and development this year. As a result, Datadog's operating expense is likely to increase in the "high 20s percent range year over year," which will have a negative impact on the company's bottom-line performance.
However, thanks to the impressive revenue pipeline it is building, there is a good chance Datadog may be able to outperform its expectations as the year progresses.
For instance, the company's remaining performance obligations (RPOs) increased 24% year over year to $2.27 billion in the previous quarter. RPO refers to the total value of a company's contracts that will be fulfilled in the future. This metric's healthy growth suggests a potential acceleration of Datadog's future growth.
Key reasons behind the healthy growth pace in Datadog's RPO last quarter include an improvement in the company's customer base as well as an increase in the number of large customers. More specifically, Datadog's customer count increased by 10% in 2024.
The good part was that the number of customers with annual recurring revenue (ARR) of more than $100,000 jumped at a slightly faster pace of 13%. It is worth noting that customers have been adopting more of Datadog's solutions despite the slowdown the company talked about on the conference call.
Moreover, Datadog expects the cloud observability and security markets to clock healthy double-digit annual growth through 2028. These markets were worth a combined $79 billion last year, which means the company is currently scratching the surface of a huge addressable opportunity that could help it step on the gas once again.
What does the valuation say?
While there's no doubt Datadog's solid base of 30,000 customers, sizable addressable market, and improved customer spending -- even in tough times -- suggest it has the potential to regain its mojo once again, current valuation may keep investors away from this cloud stock right now.
The following chart makes it clear how expensive Datadog stock is right now.
DDOG PE Ratio data by YCharts. PE Ratio = price-to-earnings ratio. PS Ratio = price-to-sales ratio.
Given the anticipated slowdown in the company's growth this year, buying Datadog at this valuation doesn't look like a smart thing to do. However, if Datadog stock continues to retreat and is available at a cheaper valuation in the future, it could be worth buying, considering the long-term growth opportunity it could take advantage of.
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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Datadog. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
