Datadog stock drops as Wolfe doubts GitLab acquisition will materialize

Investing.com - Datadog (NASDAQ:DDOG) shares declined Thursday following a Wolfe Research report casting doubt on the company’s rumored acquisition of GitLab (NASDAQ:GTLB). According to InvestingPro data, GitLab currently commands a market capitalization of $8.05 billion and maintains impressive gross profit margins of 88.5%.

GitLab’s stock had surged Wednesday after StreetInsider reported that Datadog was exploring a new takeover bid exceeding $60 per share, representing a 22% premium to GitLab’s closing price after the news broke and a 36% premium to its price before initial rumors two weeks ago. The stock has shown strong momentum recently, with InvestingPro data showing an 8.2% return over the past week. GitLab maintains a strong financial position with a healthy current ratio of 2.6, holding more cash than debt on its balance sheet.

The potential acquisition speculation first emerged in July 2024 when Reuters reported Datadog’s interest in GitLab, with renewed takeover interest reported by Betaville on October 7.

Wolfe Research expressed skepticism about the deal, stating "this is not DDOG’s optimal M&A path...we do not think DDOG will be the ultimate buyer," despite acknowledging some strategic rationale in combining GitLab’s developer pipeline with Datadog’s observability tools.

The research firm noted that Datadog CEO Olivier Pomel previously indicated during the F2Q24 earnings call that while the company considers various M&A opportunities, "the bar is very high as deals get bigger" and they weren’t looking to acquire anything material to the business at that time.

In other recent news, GitLab Inc. has been the subject of takeover speculation, with reports suggesting that Datadog may be exploring a potential acquisition. Despite the lack of confirmation from either company, this rumor led to a significant increase in GitLab’s stock price. Raymond James maintained its Outperform rating for GitLab, with a price target of $55.00, while RBC Capital also reiterated its Outperform rating, setting a price target of $58.00. Wells Fargo initiated coverage of GitLab with an Equal Weight rating, citing the company’s challenging near-term outlook as it implements a new go-to-market strategy.

Additionally, GitLab announced changes in its executive team, appointing James Shen as interim Chief Financial Officer following the resignation of Brian Robins. Shen has been with the company since January 2021 and brings extensive experience from previous roles at Meta and other firms. These developments come as GitLab navigates a period of strategic adjustments and leadership changes.

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