Datadog: What's Happening With DDOG Stock?

Forbes

a day ago

OTTAWA, ONTARIO, CANADA - 2025/01/29: In this photo illustration, the Datadog logo is seen displayed ... More on a smartphone screen. (Photo Illustration by Thomas Fuller/SOPA Images/LightRocket via Getty Images)
Datadog, (NASDAQ:DDOG), the cloud-scale application observability platform, has seen a notable increase in its stock price following the announcement of its inclusion in the S&P 500 index. This achievement marks an important turning point for the company, integrating solid operational performance with improved market positioning; however, high valuations and risks of volatility necessitate thorough consideration from potential investors.
The inclusion of Datadog in the S&P 500 brings several strategic benefits that go beyond immediate stock price growth. Being added to the index results in a substantial increase in stock price, primarily due to the influx of index funds and ETFs that are obliged to purchase the stock to align with the index. This mandatory buying generates immediate upward pressure on the stock price and cultivates a more stable demand foundation.
The heightened attention frequently leads to improved liquidity and trading volume. It also enhances credibility and visibility within the investment community, fostering a more diversified and stable shareholder base that diminishes the stock's reliance on active investment choices. Alternatively, if you seek upside with a steadier ride than an individual stock, consider the High Quality portfolio, which has outperformed the S&P, achieving over 91% returns since its inception. Additionally, take a look at – UnitedHealth: Buy Or Sell UNH Stock At $325?
Financial Performance Analysis
Datadog's revenue trajectory significantly surpasses both market projections and broader market indicators. The company has exhibited remarkable growth consistency, with revenues increasing at an average rate of 33.9% over the past three years and vastly exceeding the S&P 500's 5.5% growth rate. This momentum is evident in the latest periods, with revenues rising by 25.5%, from $2.3 billion to $2.8 billion in the past twelve months. The quarterly results further confirm this growth trend, with revenues jumping 24.6% to $762 million in the most recent quarter, up from $611 million last year. This sustained growth rate, especially when compared to the S&P 500's 4.8% quarterly improvement, demonstrates Datadog's capability to gain market share in the rapidly evolving observability and monitoring domain.
Datadog presents a nuanced profitability landscape that necessitates careful evaluation beyond conventional metrics. Datadog's operating income of $30 million (on a reported basis) over the past four quarters yields a concerning operating margin of merely 1.1%, which may initially seem weak when compared to established market benchmarks. Nevertheless, this metric does not capture the company's true underlying profitability and cash generation abilities.
Datadog's operating cash flow of $930 million during the same period indicates a robust OCF margin of 32.8%, significantly exceeding the S&P 500 average of 14.9%. The adjusted net income of $663 million, which excludes stock-based compensation and acquisition-related costs, offers a more precise depiction of the company's operational profitability. This figure translates to an adjusted net margin of 23.4%, illustrating strong underlying profitability once non-cash factors are disregarded.
Datadog possesses an exceptionally solid balance sheet that affords significant financial flexibility for future growth investments and market fluctuations. The company's debt-to-equity ratio of 4.1% is well below the S&P 500 average of 19.4%, indicating minimal financial leverage and less exposure to financial risks.
The company's liquidity status is particularly noteworthy, with cash and cash equivalents accounting for $4.4 billion of the total $6.0 billion in assets. This cash-to-assets ratio of 74.0% provides a considerable financial buffer for strategic investments, research and development, and potential acquisitions, all while ensuring operational agility during market downturns.
Valuation Analysis
Datadog's valuation indicators reflect the premium that investors are willing to pay for high-growth technology firms with strong market footholds. The company's price-to-sales ratio stands at 19.3, significantly outpacing the S&P 500 average of 3.1, while its price-to-free cash flow ratio of 55.3 is less favorable when compared to the index average of 20.9.
However, these elevated multiples must be analyzed in light of Datadog's growth profile and market potential. The current P/S ratio of 19.3 is close to the stock's three-year historical average of 18 times, implying that the recent S&P 500 inclusion has not yet inflated valuations to extreme levels compared to the company's own trading history.
The S&P 500 inclusion is likely to drive valuation multiples higher in the short term as passive fund flows increase demand for the stock. This automatic buying pressure, in combination with enhanced institutional visibility, typically leads to multiple expansion for newly included firms. Nevertheless, the current elevated valuation levels suggest limited upside potential from multiple expansion alone, making future returns more reliant on operational performance and market share enhancements.
Risk Assessment
Datadog's stock has shown considerable sensitivity to overall market conditions, especially during times of economic uncertainty. During the inflation shock of 2022, the stock faced a sharp decline of 68.1%, falling from its November 2021 peak of $196.56 to $62.69 in April 2023. This decline greatly surpassed the S&P 500's 25.4% peak-to-trough downturn during the same period, underscoring the stock's high beta nature. The stock has not yet fully rebounded from this decline, achieving a post-crisis peak of $168.65 in December 2024 before stabilizing at current levels around $135. This incomplete recovery, despite robust operational performance, suggests that investor sentiment remains wary of high-multiple growth stocks. See – Buy or fear Datadog stock – for further information.
The COVID-19 pandemic serves as a contrasting case regarding the stock's resilience during crisis situations. Datadog dropped 42.1% from $50.01 to $28.96 during the initial market turmoil in March 2020, in contrast to the S&P 500's 33.9% decline. However, the stock exhibited remarkable recovery speed, completely rebounding to pre-crisis levels by May 2020, benefiting from the accelerated digital transformation trends that surfaced during the pandemic.
The observability and monitoring sector is experiencing rising competition from both established enterprise software providers and emerging specialized solutions. Datadog must persist in innovating and expanding its platform capabilities to uphold its competitive position and validate its premium valuation. The company's proficiency in cross-selling additional services to current customers and penetrating new market segments will be vital for maintaining growth rates.
Investment Implications
Datadog represents a compelling investment opportunity for those seeking exposure to the expanding observability market, bolstered by strong operational metrics and augmented by S&P 500 inclusion advantages. The company's remarkable revenue growth, vigorous cash generation, and solid balance sheet provide a strong basis for continued expansion.
Nonetheless, the high valuation multiples and shown volatility during market downturns require careful evaluation of risk tolerance and investment horizon. While the S&P 500 inclusion offers short-term support through passive fund flows, long-term returns will depend on the company's ability to sustain growth rates and broaden market share in an increasingly competitive environment. Now, taming valuation contextually is just one of the many approaches we take while constructing the Trefis High Quality (HQ) Portfolio which, with a collection of 30 stocks, has demonstrated a history of comfortably outperforming the S&P 500 over the last four-year span. What accounts for this? As a collective, HQ Portfolio stocks delivered better returns with lower risk compared to the benchmark index; offering a less turbulent experience, as highlighted in HQ Portfolio performance metrics.