AI Integrations And Acquisitions Will Unlock Future Opportunities

Key Takeaways

• Increased customer adoption of multiple products and strong early product adoption indicate potential revenue growth and market expansion.
  
• Strategic acquisitions and AI-driven trends suggest enhanced capabilities and increased revenue opportunities in enterprise segments.
  
• Increased international marketing and R&D investments risk margin pressure, while dependency on AI-native customers and rising cloud costs threaten revenue stability and growth.

Catalysts

Operates an observability and security platform for cloud applications in the United States and internationally.

• Datadog's platform is seeing increased customer adoption, with a higher percentage of customers using multiple products, indicating a potential for future revenue growth as customers expand their usage within the platform.
  
• The rapid growth and strong early adoption of new products like Flex Logs and Database Monitoring, each nearing $50 million in ARR, highlight Datadog's ability to innovate and capture market share, potentially boosting future earnings.
  
• The growth in AI-native customers and the increasing adoption of Datadog's AI integrations suggest that AI-driven trends could be a catalyst for future revenue as these customers form a growing portion of ARR.
  
• New strategic acquisitions such as Eppo and Metaplane expand Datadog's capabilities in feature management, experimentation, and data observability, potentially increasing revenue and market opportunities.
  
• Significant growth in large deal bookings and a strong pipeline indicate potential for increased revenue and market capture, particularly in enterprise segments, further supported by continued investments in sales and marketing.

Datadog Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Datadog's revenue will grow by 19.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.8% today to 8.1% in 3 years time.
• Analysts expect earnings to reach $392.4 million (and earnings per share of $1.07) by about May 2028, up from $165.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $228 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 169.9x on those 2028 earnings, down from 221.0x today. This future PE is greater than the current PE for the US Software industry at 33.3x.
• Analysts expect the number of shares outstanding to grow by 2.57% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.75%, as per the Simply Wall St company report.

Datadog Future Earnings Per Share Growth

Risks

• The increased investment in sales and marketing, particularly international expansion and increased R&D spending, could pressure operating margins if corresponding revenue growth does not meet expectations.
  
• The volatility seen in the AI-native cohort, despite contributing significantly to revenue, could pose risks to revenue stability if such customers optimize cloud and observability usage or if similar large customer growth does not continue.
  
• The anticipations of fluctuations in gross margins, driven by rising cloud hosting costs and new product innovations, might impact the net margins if these costs persist or are not offset by revenue growth.
  
• The strong pipeline and booking activity from enterprise customers might not immediately translate to revenue, as the sales pipeline does not convert right away, potentially affecting short-term revenue projections.
  
• Despite high gross and net revenue retention rates, there is a potential risk of heightened competition and changes in customer demand, which could impact future revenue and earnings.

Valuation

• The analysts have a consensus price target of $143.287 for Datadog based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $200.0, and the most bearish reporting a price target of just $115.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.9 billion, earnings will come to $392.4 million, and it would be trading on a PE ratio of 169.9x, assuming you use a discount rate of 7.8%.
  
• Given the current share price of $106.06, the analyst price target of $143.29 is 26.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.