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On Tuesday, Stifel analysts downgraded Datadog (NASDAQ:DDOG) stock from Buy to Hold, adjusting the price target to $140 from the previous $165. The revision comes as the firm anticipates challenges for the company in the fiscal year 2025, including slower revenue growth and margin pressures. Despite these concerns, Datadog maintains impressive gross profit margins of 81.2% and has achieved revenue growth of 26.3% over the last twelve months.
Analysts at Stifel expressed concerns over Datadog’s future performance, noting that while the company’s stock has risen approximately 10% compared to the IGV since the third-quarter report in early November, the current valuation does not present an attractive risk-reward balance for investors. The valuation cited includes an enterprise value to revenue multiple of roughly 13.5 times the calendar year 2026 estimates and an enterprise value to free cash flow multiple of about 47 times. According to InvestingPro analysis, the stock appears overvalued at current levels, with an EV/EBITDA ratio of 426x.
In addition to the valuation concerns, Stifel mentioned that although OpenAI is expected to renew its contract with Datadog for another year, the company has optimized its use of Datadog’s services. This optimization is likely to create a significant growth obstacle in fiscal year 2025, with the impact expected to be most noticeable in the first quarter on a quarter-over-quarter basis. While challenges exist, InvestingPro data shows Datadog maintains a strong financial health score, with particularly robust liquidity metrics including a current ratio of 2.13.
Stifel also highlighted the need for Datadog to increase its sales and marketing investment more aggressively following a slower ramp-up post-Covid in 2023. The firm believes this is necessary to maintain what they estimate to be a core growth rate of around 20%, excluding general artificial intelligence contributions.
The downgrade reflects a cautious outlook for Datadog as it navigates through the anticipated headwinds. Stifel’s analysis suggests that investors may need to recalibrate their expectations for the cloud monitoring and analytics platform provider in the upcoming quarters.
In other recent news, Datadog has reported a 26% year-over-year revenue increase, reaching $690 million. TD Cowen analysts maintain their Buy rating on Datadog, with a price target of $165, anticipating a strong fourth quarter finish for the company. They also forecast a fiscal year 2025 guide of 19-20% growth for Datadog, which is expected to exceed market expectations. On the other hand, Morgan Stanley (NYSE:MS) has downgraded Datadog’s stock to Equal-weight, citing a balanced risk-reward scenario. Guggenheim maintains a neutral position on Datadog, influenced by the stock’s current valuation and potential risks associated with the company’s guidance.
UBS keeps a Buy rating on Datadog, raising its price target to $175 from $150, highlighting the company’s long-term growth opportunities. Loop Capital also maintains a Buy rating, projecting a significant Free Cash Flow of $7.9 billion by FY34. Furthermore, Datadog has expanded its Board of Directors with the appointment of Amit Agarwal. These are recent developments that highlight the growing confidence in Datadog’s long-term growth prospects.
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