Flex Logs And Observability Solutions Will Drive Future Market Expansion

Key Takeaways

• Expansion into AI and new partnerships are set to drive long-term revenue and bolster market adoption through increased customer acquisition.
  
• Investment in R&D and new product introductions enhance product leadership and expand market share, supporting sales and revenue growth.
  
• Datadog faces revenue growth challenges due to customer cost-cutting, high sales expenses, market competition, and potential volatility from AI customer reliance.

Catalysts

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

• Datadog's expansion into AI products and increased usage of AI capabilities by customers are expected to drive long-term revenue growth, as AI-native customers' contribution is rising and supports broader market adoption.
  
• New partnerships, investments in underserved geographies, and enhancements of sales and marketing capabilities, particularly in larger enterprises, aim to bolster customer acquisition and revenue growth.
  
• Increased customer adoption of multiple products within the Datadog platform demonstrates the potential for expanded sales and increased ARR, particularly with larger enterprises embarking on their cloud migration journey.
  
• Introduction of new products like Flex Logs and advancements in observability solutions could capture additional market share, drive cross-selling opportunities, and increase overall revenue contribution from existing customers.
  
• Investment in R&D and the continuous release of new features and capabilities aim to maintain product leadership, enhance customer value, and potentially improve operating and net margins over time.

Datadog Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Datadog's revenue will grow by 20.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 6.9% in 3 years time.
• Analysts expect earnings to reach $327.7 million (and earnings per share of $0.9) by about April 2028, up from $183.7 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $413 million in earnings, and the most bearish expecting $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 222.6x on those 2028 earnings, up from 188.5x today. This future PE is greater than the current PE for the US Software industry at 30.2x.
• Analysts expect the number of shares outstanding to grow by 2.47% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.51%, as per the Simply Wall St company report.

Datadog Future Earnings Per Share Growth

Risks

• Some Datadog customers are optimizing their cloud usage and seeking volume discounts during contract renewals, which could limit revenue growth in the near term.
  
• The company's heavier investment in sales and marketing, including a 31% increase in expenses, might not yield proportionate revenue growth if market conditions don't improve.
  
• There is continued cost consciousness among customers, which could put pressure on Datadog's net revenue retention rates and affect overall earnings.
  
• Datadog's high reliance on AI native customers means any downturn or optimization by these customers could lead to volatility in revenue growth.
  
• Competitive pressures from incumbents in the observability and log management sectors may affect Datadog's ability to capture market share, impacting both revenue and net margins.

Valuation

• The analysts have a consensus price target of $159.48 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 $230.0, and the most bearish reporting a price target of just $125.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $4.7 billion, earnings will come to $327.7 million, and it would be trading on a PE ratio of 222.6x, assuming you use a discount rate of 7.5%.
• Given the current share price of $101.06, the analyst price target of $159.48 is 36.6% 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.