Datadog has been on fire lately. In the past six months alone, the company’s stock price has rocketed 79.7%, reaching $252.65 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.
Following the strength, is DDOG a buy right now? Or is the market overestimating its value? Find out in our full research report, it’s free.
Why Is DDOG a Good Business?
Named after a database the founders had to painstakingly look after at their previous company, Datadog (NASDAQ: DDOG) provides a software platform that helps organizations monitor and secure their cloud applications, infrastructure, and services.
1. ARR Surges as Recurring Revenue Flows In
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
Datadog’s ARR punched in at $4.23 billion in Q1, and over the last four quarters, its year-on-year growth averaged 29.5%. This performance was fantastic and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes Datadog a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue. 
2. Projected Revenue Growth Is Remarkable
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite, though some deceleration is natural as businesses become larger.
Over the next 12 months, sell-side analysts expect Datadog’s revenue to rise by 24.2%. While this projection is below its 27.5% annualized growth rate for the past two years, it is healthy and indicates the market is baking in success for its products and services.
3. Customer Acquisition Costs Are Recovered in Record Time
The customer acquisition cost (CAC) payback period represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for sales and marketing investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.
Datadog is extremely efficient at acquiring new customers, and its CAC payback period checked in at 14.8 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Datadog more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments. 
Final Judgment
These are just a few reasons why we’re bullish on Datadog, and after the recent surge, the stock trades at 19.7× forward price-to-sales (or $252.65 per share). Is now a good time to buy despite the apparent froth? See for yourself in our comprehensive research report, it’s free.
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