Is Datadog stock a buy after impressive Q2 results? Strong earnings and growth prospects signal opportunity

Datadog Inc. (NASDAQ: DDOG), the leading monitoring and security platform for cloud applications, has reported impressive second-quarter earnings that exceed market expectations, prompting investors to reassess the stock’s potential.

On Thursday, Datadog announced a Non-GAAP EPS of $0.43 for Q2 2024, surpassing analysts’ forecasts by $0.07.

Additionally, the company achieved revenue of $645 million, marking a robust 26.7% increase year-over-year and exceeding predictions by $19.9 million.

The company’s solid performance highlights its operational efficiency, with operating cash flow reaching $164 million and free cash flow at $144 million.

This strong financial showing led to a notable 9% increase in Datadog’s stock price at market open today.

Datadog’s financial stability is underscored by its liquidity, with cash, cash equivalents, and marketable securities totaling $3.0 billion as of June 30, 2024.

The company also saw its customer base with Annual Recurring Revenue (ARR) of $100,000 or more grow by 13% year-over-year to approximately 3,390 customers.

Ambitious targets

Looking ahead, Datadog has set ambitious targets for the upcoming quarters. For Q3 2024, the company projects revenues between $660 million and $664 million and expects a Non-GAAP net income per share between $0.38 and $0.40.

For the full year, Datadog anticipates revenues in the range of $2.62 billion to $2.63 billion, with non-GAAP operating income expected between $620 million and $630 million.

These projections surpass the company’s previous forecasts shared during the Q1 earnings release.

CEO Olivier Pomel credited the quarter’s success to exceptional execution and the expanding adoption of Datadog’s multi-product platform.

The company’s commitment to innovation was showcased at the DASH 2024 user conference, where new products like Agentless Scanning, Data Security, and Code Security were introduced.

These enhancements strengthen Datadog’s security offerings and reinforce its leadership in cloud monitoring.

The launch of the Live Debugger tool, along with the general availability of LLM Observability and Kubernetes Autoscaling solutions, has further solidified Datadog’s market position as a frontrunner in cloud monitoring.

key appointments in the leadership team

Datadog has also bolstered its leadership team with key appointments.

Yanbing Li has been appointed Chief Product Officer, bringing valuable experience from Google, while David Galloreese joins as Chief People Officer, bringing a wealth of expertise from Walmart.

Datadog’s integrated platform offers a comprehensive suite of monitoring and security solutions, differentiating it from competitors like New Relic and Dynatrace.

This unique positioning enables Datadog to capture a larger share of the growing demand for cloud-based monitoring.

However, the competitive landscape in the technology sector demands continuous innovation and adaptation.

Datadog’s ability to stay ahead of technological shifts and meet evolving customer expectations will be critical to sustaining its growth trajectory.

Valuation

In terms of valuation, Datadog’s forward price-to-earnings (P/E) ratio, based on the upper end of its EPS guidance ($1.66 for FY24), reflects a premium compared to the industry average, signaling strong investor confidence.

However, the company’s price-to-sales (P/S) ratio, considering current revenue forecasts, suggests a premium valuation relative to historical averages.

As we analyze Datadog’s stock performance, it will be crucial to monitor whether the current price trajectory aligns with its robust fundamentals.

Following a surge in stock price after its IPO in September 2020, Datadog’s stock peaked near $200 in November 2021 before a significant decline, reaching lows near $62 early last year.

The recent Q2 results could signal a potential turning point, making Datadog an intriguing stock to watch for both long-term and short-term investors.

Resistance above $138 is a big hurdle

Although the stock has doubled since then, it has faced significant resistance trading above $138 since the start of 2024. Another thing to note is that the stock’s 100-day moving average is on the verge of crossing below its 200-day moving average, which is a potential signal for a long-term downtrend.

DDOG chart by TradingView
Hence, investors, bullish on the stock but haven’t bought it yet, must tread with caution and not initiate a significant long position until the stock closes above $138 on the daily charts. They can accumulate the stock at current levels but must keep a strict loss below the short-term swing Low at $98.80.

Traders who are bearish on the stock may use today’s bounce for a fresh shorting opportunity.

If the stock gives up today’s gain in the coming days, that will indicate bearish momentum is going to persist in the medium term and the stock might once again fall back to below $100, where one can book profits on short positions.

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