Datadog in the Doghouse After Disappointing Forecast: Time to Buy the Stock on the Dip?

Datadog (DDOG) stock took a nosedive on Thursday, February 13, following the company's fourth-quarter 2024 earnings report. Despite beating analysts' expectations, Datadog's guidance for the first quarter and full year 2025 left investors unimpressed, sending shares down by around 9%. But is this dip an opportunity for investors to snap up the stock at a discount, or is Datadog's outlook too bleak to warrant a buy? Let's dive into the numbers and assess the company's prospects.

Datadog reported revenue of $738 million for the fourth quarter, up 25% year-over-year, and earnings of $45.6 million, or 13 cents per share. However, the company's outlook for the first quarter and full year 2025 was less rosy. Datadog expects revenue in the range of $737 million to $741 million for the first quarter, with earnings per share between 41 cents and 43 cents. For the full year, the company forecasts earnings per share between $1.65 and $1.70, with revenue ranging from $3.18 billion to $3.2 billion.



The slowdown in Datadog's revenue growth, from 27% in 2023 and 2022 to 26% in 2024, is a concern for investors. Additionally, the company's guidance for 2025 suggests that revenue growth may continue to decelerate. Datadog's intense competition from tech giants like IBM and Microsoft, as well as specialized APM firms and cloud providers, is another headwind for the company. The 'Risk Factors' section of Datadog's filings emphasizes the vulnerability of the company's financial performance to unfavorable economic conditions and IT spending reductions.

Despite these challenges, Datadog has several strengths that could help it regain momentum. The company's high dollar-based net retention rate, indicating strong customer loyalty and platform expansion, is crucial for sustained revenue growth. Datadog's product innovation, as demonstrated by the launch of Event Management and LLM Observability in 2024, showcases the company's ability to adapt to emerging tech trends like AI. Moreover, Datadog's free cash flow growth of 30% to $775 million in 2024 highlights the company's financial strength and flexibility.



Investors should consider Datadog's valuation when deciding whether to buy the stock on the dip. With a market cap of $47 billion and a forward P/E ratio of 66.45, Datadog's valuation is higher than that of many of its industry peers. However, the company's high growth potential and strong financial performance could justify its premium valuation.

In conclusion, Datadog's disappointing forecast has sent the stock tumbling, but the company's strong customer loyalty, product innovation, and financial strength could help it regain momentum in the long run. However, investors should be cautious about the company's slowing revenue growth, intense competition, and vulnerability to economic headwinds. Before making a decision, investors should carefully consider Datadog's valuation and weigh the risks and rewards of buying the stock on the dip. As always, it's essential to do your own research and consult with a financial advisor before making investment decisions.