Datadog Stock Drops Amid Slowdown in Customer Spending Forecast

Investors reacted negatively to Datadog's fourth-quarter results, which showed a forecast of declining earnings due to slowed customer spending. Though the company's revenue increased significantly, caution in future guidance led to an 8% drop in stock price. Is it time to buy?

Date: 20-02-2025

AI Rating: 5

Slowdown in Earnings Guidance
Datadog stock has faced a setback despite reporting a 26% increase in revenue and a 38% rise in earnings in the previous year. The current forecast suggests revenue growth will decelerate to 18%, with earnings expected to shrink in the high single digits. This change in outlook is concerning for investors, causing the stock to decline over 8%.

Impact on Profit Margins
Datadog's management has expressed concern regarding customer spending habits, stating that customers are "remaining cost conscious and seeking efficiency and value from their spend." This approach indicates potential pressure on profit margins moving forward due to increased operating expenses projected to grow in the high 20% range.

Remaining Performance Obligations
While Datadog is facing short-term pressures, the growth of its remaining performance obligations (RPOs) is promising. An increase of 24% to $2.27 billion shows strong future potential. RPOs reflect the company's contracts that will be fulfilled in the future and suggest a healthier revenue pipeline, which might mitigate the impact of current challenges.

Valuation Concerns
Even with a potentially strong long-term outlook, investors may find the current valuation of Datadog stock too high, given the anticipated slowdown. If the stock price declines further and presents a more attractive valuation, the investment opportunity might be worth reconsidering.

Stocks: DDOG