Datadog (DDOG): Earnings Preview- Can it live up to high expectations?

Datadog, a leading cloud monitoring software company, is set to report its earnings for the quarter tomorrow. 

Strong Previous Quarter and Accelerating Growth 

Last quarter, Datadog reported revenues of $547.5 million, surpassing analyst expectations by 4.5% and recording a year-on-year growth of 25.4%. The company achieved accelerated growth in its large customer base, adding 140 enterprise customers who pay more than $100,000 annually. This positive performance led to optimistic revenue guidance for the upcoming quarter, indicating robust business momentum. 

Analyst Expectations and Historical Performance

For the current quarter, analysts anticipate a year-on-year revenue growth of 21.2% to reach $568.8 million. Although this marks a slowdown compared to the previous year's growth rate of 43.9%, it still reflects healthy expansion. Moreover, most analysts have reconfirmed their estimates in the last thirty days, suggesting confidence in the company's performance. 

It is worth noting that Datadog has consistently exceeded Wall Street's revenue expectations over the past two years, beating estimates by an average of 5.6%.

Industry Peers' Results and Investor Sentiment 

Examining Datadog's peers in the software development segment, we find that Dynatrace and Cloudflare have already reported their Q4 earnings. Dynatrace delivered a 22.7% year-on-year revenue growth, surpassing analyst estimates by 2.1%, while Cloudflare recorded a revenue increase of 32%, beating estimates by 2.7%. 

However, Dynatrace's stock traded down 14.9% on the release, while Cloudflare's stock gained 20.2%. The software development segment has seen positive sentiment among investors, with stocks rising by an average of 8.2% over the last month. 

Datadog's stock has outperformed this sector, increasing by 9.9% during the same period and reaching an analyst price target of $130.3. 

Expert Projections for 2023 and Upside Potential 

BTIG projects Datadog's revenue for Q4'23 to be $569 million, representing a year-on-year growth of 21%. In an upside scenario, they believe the company can achieve closer to $590 million, translating to a 26% year-on-year growth. This projected growth aligns with Datadog's historical performance, and BTIG expects the company to guide conservatively for 2024, as it has done in the past. 

While the revenue upside in 2023 may be lower than management's original expectations, Datadog has a proven track record of surpassing its initial guidance by significant margins in previous years. 

Bernstein expects Datadog's Q4 results to meet the lower end of buy-side expectations. However, they believe that the company's guidance for FY24 will be satisfactory. Notably, the discussion around Datadog's performance leading up to the quarter has generated conflicting signals. Bernstein analyzes various factors such as results from hyperscalers, observability players, AI trends, and channel checks to form their outlook for the company. 

Wedbush's checks with channel partners were neutral/positive with some partners saying momentum was similar to last quarter while some mentioned an uptick. Wedbush's analysis shows that FQ4'23E buyside estimates appear reasonable and its AWS correlation analysis shows that $585M-$590M in revenues should be doable. 

Conclusion 

Considering the positive outlook for Datadog's revenue growth and the strong performance of its peers in the software development segment, the company appears well-positioned to continue its expansion. Investor sentiment has been optimistic, evident from the stock's recent gains and the analyst price target surpassing the current share price. While there may be some debate and conflicting signals leading up to the earnings report, Datadog's historical performance and analyst projections indicate its growth potential. Disclaimer: This article does not provide personalized investment advice. Investors should conduct their own research and consider their risk tolerance before making any investment decisions.

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