Datadog Earnings: Continued Demand Normalization as Usage Growth Shows Signs of Improvement

We are maintaining our $115 fair value estimate for narrow-moat Datadog DDOG after the firm reported robust financial results for the third quarter of 2023. The positive impact of these results was tempered by our lowering of aggressive long-term growth estimates, leading to our fair value estimate remaining unchanged. On the macro front, management commentary on demand stabilization indicated that the brunt of cloud optimization, which has negatively impacted Datadog’s financials, may be in the rearview mirror. As a company that operates on a consumption-based model, Datadog is susceptible to optimization as customers can decrease their spend on Datadog swiftly as they tighten their own fiscal belts. Encouragingly, Datadog saw usage trends improve sequentially in the third quarter and remain strong in the first month of the ongoing fourth quarter. We view these trends as a good omen for the firm and are still modeling strong revenue growth in fiscal 2024 as demand normalization continues.

We believe this commentary, coupled with strong financial results, pleased investors and drove shares to jump sharply intraday. Datadog’s shares now trade in the 3-star range, and we view them as fairly valued.

Datadog’s sales for the third quarter clocked in at $548 million, up 25% year over year and above management’s high end of guidance. The top-line strength was spearheaded by a healthy mix of both landing new clients as well as expanding spend from existing ones. The firm reported a record number of new customer deals with a value exceeding $100,000 per year. On the upselling front, Datadog continued to grow existing customers with 46% of its customers using four or more Datadog modules, up from 40% a year ago. We believe multi-module vendors, such as Datadog, stand to win in the long term, as customers increasingly switch to platforms that can serve a variety of their IT needs versus onboarding vendors that offer point solutions.