Potential Datadog Price Target After Oracle Expansion Drives Beat
The cloud firm suggested a price target with room to run after forming a double-top pattern.
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On Thursday morning, New York-based Datadog (DDOG) went to the tape with the firm's third quarter financial results. The stock is trading sharply higher. For the period ended September 30, the big-data, analytics, observation and security platform provider posted an adjusted EPS of $0.55 (GAAP EPS: $0.10) on revenue of $886.651 million.
These top- and adjusted bottom-line results both comfortably beat Wall Street's expectations while the sales print was good for year-over-year growth of 28.4%. Nearly the entirety of the adjustment was made for the purpose of stock-based compensation.
The firm now boasts 4,060 customers contributing annual recurring revenue (ARR) of $100,000 or more, up from 3,490 (+16,3%) a year ago. During the quarter, the firm expanded support for Oracle (ORCL) Cloud Infrastructure to include new integrations for GPU monitoring, Cloud Cost Management and Cloud SIEM to help users gain full-stack visibility and security. The firm also reached 1,000 integrations on Datadog's unified platform, underscoring the company's ability to support AI, cloud computing and security services.
Lastly, the firm also announced that Datadog for Government is now operational for GovRamp High Authorization.
Operations
As revenue generation increased 28.4% to $888.651 million. Out of that came the cost of revenue at $176.457 million (+28.1%). This left a gross profit of $709.457 million (+28.4%) on a gross margin of 80.1%. Total GAAP operating expenses came to $715.003 million (+34.4%), leaving a GAAP operating income/loss of -$5.809 million, down from $20.278 million a year ago. This was largely because stock-based compensation grew 41.1% to $200.558 million. Can't make this stuff up, gang.
Once adjusted, operating income printed at $207.364 million (+19.8%) as the firm's adjusted operating margin dropped from 25% to 23%. After accounting for interest, other income and expenses and taxes, GAAP net income landed at $33.885 million (thanks to $43.897 million in non-operating income). This works out to $0.10 per fully diluted share, down from $0.14 for the year-ago comp. Once adjusted, net income printed at $197.41 million (+19.1%). That works out to $0.55 per fully diluted share, up from $0.46.
Guidance
For the current quarter, Datadog sees revenue of $912 million to $916 million, which is above the $886 million or so that Wall Street had in mind. Adjusted operating income is seen at $216 million to $220 million. At the midpoints that would be an adjusted operating margin of 23.9%. Adjusted EPS is projected at $0.54 to $0.56. This is far better than Wall Street consensus of $0.45 and would be up from $0.49.
For the full year, the firm is projecting revenue of $3.386 billion to $3.39 billion, up from prior guidance of $3.312 billion to $3.322 billion. Wall Street was looking for $3.33 billion. Adjusted operating income is seen at $754 million to $758 million. At the midpoints that would be an adjusted operating margin of 22.3%. Adjusted EPS is seen at $2.00 to $2.02, up sharply from prior guidance of $1.80 to $1.83 and far better than the $1.84 that had been consensus.
Fundamentals
For the period reported, Datadog generated operating cash flow of $251.47 million. Out of that came capex spending of $37.518 million, leaving free cash flow of $213.952 million (+5.1%). Free cash flow margin dropped from 30% to 24%. The firm does not return capital to shareholders.
Glancing at the balance sheet, Datadog closed out the quarter with a cash position of $4.14 billion and current assets of $4.838 billion. Current liabilities add up to $1.321 billion. This includes no short-term debt, but deferred revenue (which is not a true financial obligation) of $974.264 million. That puts the firm's headline current ratio at a quite robust 3.66. Once adjusted for those deferred revenues, this ratio rises to an absolutely herculean 13.94.
Total assets amount to $6.052 billion, including $546.853 million in goodwill and other intangibles. At 9% of total assets, this is no issue. Total liabilities less equity comes to $2.613 billion. That does include convertible senior notes of $984.402 million. This is an excellent, well-managed balanced sheet. As much as I want to knock the firm for all of the stock-based compensation, the firm is in great shape.
My Thoughts
Is everything wonderful? No. Margins seem to be contracting. That said, sales growth is on fire. Cash flows are strong enough. The balance sheet is in fantastic shape. Oh, and the increased guidance beats Wall Street on just about every level. The fundamentals are a significant positive.
Readers will see that DDOG broke out of a triangle pattern that sort of developed into a bullish pennant over the summer. The stock tried to form a sloppy looking double-top pattern if bearish reversal that has clearly now failed. If I used the apex of that sloppy double top as my pivot, my target price would likely end up between $200 and $208, so there could still be room to run.
That said, rather than chase the stock on a day like this, I would rather go out to December monthly expiration (December 19), which will also be a triple witching expiration event and sell $165 puts for about $3.65. If the stock never comes in, the trader pockets the premium. If the stock does retest the gap just created, and the trader does have the shares put to him or her, at least the net basis for the position would be $161.35 and not something in the high $180s.
At the time of publication, Guilfoyle had no positions in any securities mentioned.
