Summary:

• Datadog has incredible growth of over 79% and excellent profitability fundamentals.
• The company’s price is 12.2x the sales futures price, while competitors range from 3.6x to 8x.
• For the valuation to hold, the company may need to become the market leader and avoid competition from the big cloud providers.

Datadog (NASDAQ:DDOG) captivates investors with its high revenue growth rate of 79% and an estimated total addressable market (TAM) value of $53 billion by 2025. However, the company has a forward price ratio to sales of 14.3x, which is ahead of the industry average ratio of 7.9x. For this to work for investors, the company must maintain its high performance for more than 6 quarters to reach the average, when it can afford to have lower growth rates.

Today we’re going to review the fundamentals of Datadog and compare it with some key competitors.

Check out our latest analysis for Datadog

Deals

Datadog is a monitoring service for cloud-based applications, providing visibility into system performance and health. It offers features like performance monitoring, alerts, and dashboards. Datadog’s business model is to provide a cloud-based monitoring and analytics platform. The platform includes a hosted SaaS service, an on-premises software agent, and a public API. Concretely, this is what companies can use to see if all systems are operational and to deal with incidents in their IT infrastructure.

Fundamentals

The company earned $1.366 billion in revenue in the last 12 months, with analysts estimating that figure will reach $2.232 in 2024. The company has a gross margin of 79%, an operating cash margin of 29.5% and a free cash flow margin of 25.8. %. This indicates the possibility of high potential future profitability, as analysts expect the net margin to converge to the FCF margin in the future.

The chart below shows how analysts view Datadog’s revenue future:

Competition

Datadog’s business model is not new, and the company has competition. Here is an overview of some of the major peers involved in the application and data observability segment:

Splunk Inc. (NASDAQ: SPLK)

Splunk is a $13.2 billion market capitalization company, trading at a forward price-to-sales ratio of 3.6x.

It provides and operationalizes information from data generated by digital systems. The company uses the Splunk platform, a real-time data collection, analysis and management solution.

New Relic (NYSE: NEWR)

New Relic is a $3.7 billion market capitalization company, trading at a futures price-to-sales ratio of 3.8x.

It provides a platform for developers to monitor the performance of their web applications. It gives them real-time insight into application performance and provides troubleshooting and optimization tools.

Dynatrace (NYSE:DT)

Dynatrace is a $9.3 billion market capitalization stock, trading at a forward price-to-sales ratio of 7.9x.

It provides detailed information about application performance and helps to troubleshoot issues. Dynatrace also provides insight into application health and overall system performance.

PagerDuty (NYSE:PD)

The $2 billion market cap company trades at a forward price-to-sales ratio of 4.9x.

PagerDuty is an on-call management and incident response platform that helps organizations improve their agility and resilience. It provides a single platform to coordinate all of an organization’s response efforts. The company also offers a comprehensive feature set for incident management, such as incident escalation policies, response manuals, and post-incident reviews.

What this means for investors

When we compare Datadog to other companies, we find that it is relatively overvalued at a forward price-to-sales ratio of 14.3x, compared to closer peers that range from 3.6x to 8x. With a TAM of $53 billion, Datadog must not only grow, but also take future market share from these competitors and become a more than 10% market leader in observability. Additionally, it needs to find a way to avoid big cloud competitors such as AWS, G-Cloud, and Azure, which might decide to offer observability solutions at more competitive prices.

Datadogs’ response to these risks is innovation, as the company hopes to put up barriers to entry by creating software that is difficult to replicate and valuable to businesses. When evaluating the business, investors should consider how replicable the software really is, before they get caught up in the high growth rates.

With all of this in mind, while it’s great to see the company outperform in terms of growth, it can have an expensive and risky valuation. Investors bullish on the sector may see a better spread of risk or possibly a better entry point for the stock.

By examining the risks in depth, we have identified 3 warning signs for Datadog which you should be aware of before investing.

Sure, you might find a fantastic investment by looking elsewhere. So take a look at this free list of companies that insiders are buying, and this list of growth stocks (based on analyst forecasts)

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Simply Wall St analyst Goran Damchevski and Simply Wall St have no position at any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials.