Datadog has been treading water for the past six months, recording a small loss of 1.2% while holding steady at $150. The stock also fell short of the S&P 500’s 5.4% gain during that period.
Is now the time to buy DDOG? Or does the price properly account for its business quality and fundamentals? 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) is a software-as-a-service platform that makes it easier to monitor cloud infrastructure and applications.
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 $3.20 billion in Q1, and over the last four quarters, its year-on-year growth averaged 27.2%. 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. 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 20.4 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.
3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Datadog has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging 29.4% over the last year.
Final Judgment
These are just a few reasons why we're bullish on Datadog. With its shares lagging the market recently, the stock trades at 16.1× forward price-to-sales (or $150 per share). Is now a good time to initiate a position? See for yourself in our comprehensive research report, it’s free.
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