Datadog DDOG is scheduled to release fourth-quarter 2024 results on Feb. 13.

For the fourth quarter of 2024, Datadog anticipates revenues between $709 million and $713 million. The Zacks Consensus Estimate for the same is currently pegged at $711.65 million, suggesting 20.69% growth from the year-ago period.

Non-GAAP earnings per share are expected in the range of 42-44 cents. The Zacks Consensus Estimate for earnings has remained unchanged at 43 cents per share over the past 30 days, indicating a decline of 2.27% from the year-ago period.

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In the last reported quarter, Datadog delivered an earnings surprise of 17.95%. Datadog’s earnings beat the Zacks Consensus Estimate in each of the trailing four quarters, the average being 18.14%.

Earnings Whispers for DDOG

Our proven model does not conclusively predict an earnings beat for Datadog this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.

Datadog has an Earnings ESP of 0.00% and a Zacks Rank #3 at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

Factors to Consider

Datadog’s fourth-quarter performance is expected to have been driven by the company's cloud-based monitoring and analytics platform. The ongoing trend of digital transformation and cloud migration across various industries is expected to have boosted demand for DDOG's services, potentially leading to significant growth in the company's customer base and revenues.

In the third quarter of 2024, Datadog reported impressive customer metrics that are likely to have continued into the quarter under review. The company had 3,490 customers with an annual run rate (ARR) of $100,000 or more, which increased 12% year over year. These customers generated about 88% of the total ARR. At the end of the third quarter, 83% of customers used two or more products, up from 82% in the year-ago quarter. Additionally, 49% of customers utilized four or more products, up from 46% in the year-ago quarter, highlighting Datadog's success in attracting and retaining enterprise-level customers.

The company's multi-cloud and multi-vendor approach allows customers to monitor their entire cloud infrastructure from a single platform, regardless of the cloud providers they use. This unified view enables organizations to optimize performance, troubleshoot issues and maintain robust security across diverse cloud environments.

Datadog operates in a competitive observability and monitoring market, facing rivals, such as New Relic, Dynatrace DT and Splunk. While Datadog has differentiated itself through its unified platform and multi-cloud integrations, its competitors also offer robust solutions and have established customer bases. Additionally, tech giants like Microsoft MSFT and Amazon AMZN have their monitoring tools, potentially posing a threat to Datadog's market share.

Significant investments in sales and marketing to engage customers, increase brand awareness and drive adoption of its platform and products are expected to have weighed on profit margins in the to-be-reported quarter.

Product Innovation to Aid DDOG Clientele in Q4

As Datadog approaches its fourth-quarter earnings report, the company's recent product innovations and expansions are expected to play a crucial role in driving growth and attracting new clients. 

The quarter under review has seen Datadog announce the launch of Kubernetes Active Remediation built on automated troubleshooting process to deliver remediation guidance, end to end issue management and best practices for Kubernetes organizations.

Datadog introduced a modern Cloud SIEM solution that simplifies activation without requiring specialized teams. The approach aims to streamline onboarding, reduce migration risks and make security more accessible.

Datadog announced that its Database Monitoring product now observes MongoDB databases. With this, Datadog Database Monitoring now supports five popular database types – MongoDB, Postgres, MySQL, SQL Server and Oracle.

DDOG Price Performance & Stock Valuation

Datadog has seen its stock jump 9.1% in the past year, underperforming the Zacks Computer and Technology sector’s return of 20.7%. This pullback has some investors wondering if it is a selling opportunity for the high-growth software company ahead of fourth-quarter earnings results.

1-Year Performance

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Additionally, the company's valuation may be a concern for some investors, as the stock trades at a premium compared to the broader Zacks Internet - Software industry. As of the latest data, Datadog’s forward 12-month P/S ratio hovers around 15.28, reflecting investors' high growth expectations. This valuation is justified by Datadog's strong revenue growth, expanding customer base and increasing product adoption.

DDOG’s P/S F12M Ratio Depicts Stretched Valuation

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Investment Thesis

While Datadog retains its cloud observability leadership position, mounting concerns shadow its fourth-quarter 2024 earnings outlook amid escalating competitive pressures and tech spending headwinds. Though the company demonstrates robust platform capabilities and customer loyalty, profitability faces dual challenges from aggressive sales and marketing investments and intensifying competition from Microsoft, Amazon and the newly merged Splunk-Cisco entity.

The company's premium valuation appears increasingly vulnerable considering decelerating growth, potential enterprise budget constraints, and mounting pricing pressure in the observability market. Despite favorable long-term secular trends, near-term headwinds and market saturation concerns warrant investor caution ahead of fourth-quarter results.

Final Thought

Despite Datadog's strong market position and comprehensive product suite, current premium valuation multiples coupled with intensifying competitive dynamics, particularly following the Splunk-Cisco merger, suggest potential investors should exercise patience before initiating positions ahead of third-quarter results. While the company demonstrates robust platform capabilities and customer retention, several factors warrant caution, including aggressive sales and marketing spend impacting margins, possible enterprise IT budget constraints, and broader macroeconomic uncertainties. Existing shareholders should maintain positions given long-term secular growth in cloud observability, but prospective investors may find more favorable entry points after fourth-quarter 2024 earnings provide greater clarity on margin trajectories and the competitive landscape.

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