On Thursday, Goldman Sachs increased its price target on Datadog (NASDAQ:DDOG) shares to $162 from the previous $150, while keeping a Buy rating on the stock. This adjustment follows Datadog's strong third-quarter financial performance, which included revenue that was 4% higher than the consensus and significant outperformance in operating margin (OpM) and free cash flow margin (FCFM) by 240 and 490 basis points, respectively.
Datadog's stock rose by approximately 2% mainly as investors are weighing the company's stable growth in the third quarter relative to the first half of 2024 and the third quarter of 2023, which saw a 26% increase. The firm also noted an improved fiscal year 2024 OpM outlook, which is now anticipated to be 25% versus the prior 24%.
The analysis by Goldman Sachs highlighted the long-term positive signal of growing attribution that expands Datadog's revenue opportunities. This comes despite a moderation in core growth excluding general artificial intelligence (Gen-AI) customers compared to the first half and third quarter of 2023, and the potential for more quarter-over-quarter volatility due to optimization efforts.
Goldman Sachs expressed a more constructive view on Datadog's prospects, expecting mid-20% growth through fiscal year 2025. This outlook is based on several factors: improving net revenue retention (NRR) as enterprises re-engage with cloud initiatives, stable performance in the small and medium-sized business (SMB) sector, conservative fourth-quarter guidance that seems to imply room for upside, and inflecting usage trends.
Additionally, the firm sees growth optionality against a steady core Observability platform, which has an annual recurring revenue (ARR) of $2.5 billion, with 15 out of 23 products generating more than $10 million in ARR each. Goldman Sachs also cited the continued ramp-up in sales capacity as a positive factor. In conclusion, the report reaffirmed the belief that Datadog is uniquely positioned to sustain over 20% growth due to its best-in-class platform, solid core cloud workload opportunity, and long-term artificial intelligence upside from the monetization of higher-value GPU instances.
In other recent news, Datadog, a cloud-based monitoring and analytics platform, has showcased significant growth in its Q3 2024 results. The company reported a 26% year-over-year revenue increase, reaching $690 million, and added approximately 2,400 new customers. Furthermore, the number of customers contributing over $100,000 in annual recurring revenue (ARR) has risen to 3,490, accounting for 88% of the total ARR. Datadog's free cash flow was also strong, standing at $204 million with a 30% margin.
In addition to these developments, DA Davidson, a prominent financial services firm, has recently raised its price target for Datadog from $140.00 to $150.00, maintaining a Buy rating. The firm emphasized the company's rapid growth in AI native customer usage and the high demand for its OnCall product, which is still in limited availability. DA Davidson's analysis suggests that Datadog is well-positioned to sustain high growth within its industry.
InvestingPro Insights
Datadog's recent performance and Goldman Sachs' optimistic outlook are further supported by real-time data from InvestingPro. The company's market capitalization stands at $43.77 billion, reflecting its significant presence in the cloud observability space. Datadog's impressive revenue growth of 26.18% over the last twelve months aligns with Goldman Sachs' projection of mid-20% growth through fiscal year 2025.
InvestingPro Tips highlight Datadog's financial strength and market position. The company "holds more cash than debt on its balance sheet," which provides financial flexibility to invest in growth initiatives and weather potential market volatility. Additionally, Datadog boasts "impressive gross profit margins," with the latest data showing a gross profit margin of 81.57% for the last twelve months as of Q2 2024. This high margin reflects the company's efficient operations and strong pricing power in the competitive cloud monitoring market.
For investors seeking a deeper understanding of Datadog's potential, InvestingPro offers 13 additional tips, providing a comprehensive view of the company's financial health and market position.
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