Cloud computing is among the most impactful technology developments of this millennium so far. Yet, with the advent of new technologies comes new vulnerabilities and opportunities for cybersecurity firms.
Helping to keep the cloud secure is New York-based Datadog (NASDAQ:DDOG). The company provides monitoring and security software that’s ideal for cloud applications.
On most days, Datadog doesn’t get much attention on Wall Street as it’s a mid-cap business that’s not part of the “Magnificent Seven.” However, today Datadog is trending, and if you have a dog in the race, then a small share position could fetch you sizable returns.
Sometimes smaller is better
Datadog, with its $21 billion market capitalization, is a smaller and lesser-known company than cybersecurity competitors like Snowflake (NYSE:SNOW) with its $48 billion market cap and Crowdstrike (NASDAQ:CRWD) with its 45 billion market cap. On the other hand, bigger isn’t always better, especially for financial traders looking for fast market movers.
When a company is comparatively smaller and lesser-known, its shares can be more volatile. That means greater risk but also potentially outsized rewards when there’s a positive surprise.
Today provided a textbook example of this as Datadog stock surged 23% in the premarket hours. All of a sudden, this generally under-the-radar cybersecurity stock was trending on financial social media.
It’s not difficult to find the catalyst as Datadog had just released its earnings results for the third quarter. The stakes were high this time around because Datadog had a stellar track record of quarterly EPS beats, and investors wanted to know if the company could deliver another earnings beat amid persistent inflation.
While inflation has undoubtedly forced businesses to cut their expenses back, cybersecurity is a necessity in the 2020s. At least, that’s the takeaway we might glean from Datadog’s Q3 2023 report, which once again smashed Wall Street’s EPS forecast and demonstrated that a broad variety of businesses are still willing to spend money on cloud-protection software.
Datadog CEO Olivier Pomel drove this point home, declaring that companies “across all industries and sizes are building cloud applications and services to deliver positive business outcomes.” These outcomes, Pomel added, include having “more users” and driving “higher revenue growth, improved productivity, and cost savings.”
Solving the pain points
Additionally, Pomel emphasized his company’s “continued focus on solving” its clients’ “pain points.” Evidently, pain for those customers resulted in gains for Datadog as the company’s third-quarter revenue grew 25% year over year to $547.5 million.
That top-line result beat the analysts’ consensus estimate of $524.7 million. Speaking of quarterly beats, Datadog also reported non-GAAP net earnings of 45 cents per diluted share, thereby exceeding Wall Street’s forecast of 34 cents per share.
Moreover, by one particular measure, Datadog actually pivoted to profitability. Specifically, Datadog evolved from a $25.985 million net loss in the third quarter of 2022 to $22.63 million in net income in Q3 2023.
On the other hand, Datadog had some pain points of its own. In particular, the company spent more in the third quarter of 2023 than in the year-earlier quarter. From research and development to sales and marketing and in the general and administrative category, Datadog’s operating expenses increased across the board.
It’s easy to simply attribute this ramp-up in expenditures to inflation. However, going forward, investors should want to see Datadog implement some cost-cutting measures in order to bolster its bottom line.
Still, there’s no denying that Datadog had a terrific quarter. Impressively, the company reported 3,130 “larger customers” (i.e., customers with annual recurring revenue of $100,000 or greater) at the end of Q3.
That’s up by about 20% compared to roughly 2,600 “larger customers” in the year-earlier quarter. Thus, big businesses are increasingly turning to Datadog for essential cloud monitoring and threat detection in 2023.
How high could Datadog stock go?
Looking to the current quarter, Datadog anticipates generating revenue of $564 million to $568 million. This implies growth from the third-quarter revenue result of $547.5 million.
Furthermore, Datadog guided for current-quarter non-GAAP net income per share of 42 cents to 44 cents, which seems attainable at this point. Of course, these are only projections, and there are no guarantees that Datadog will actually meet its objectives.
Nevertheless, the company is clearly on the right track as it continues to attract big-money clients and post decent profits. If Datadog can maintain those customers and rein in its expenditures, I wouldn’t be surprised if DDOG stock breaks through its 52-week high of around $118 within the next few months.
