Datadog's (NASDAQ:DDOG) Q4 Sales Beat Estimates But Stock Drops 14.4%

Full Report / February 13, 2024

Cloud monitoring software company Datadog (NASDAQ:DDOG) beat analysts' expectations in Q4 FY2023, with revenue up 25.6% year on year to $589.6 million. The company expects next quarter's revenue to be around $589 million, in line with analysts' estimates. It made a non-GAAP profit of $0.44 per share, improving from its profit of $0.26 per share in the same quarter last year.

Datadog (DDOG) Q4 FY2023 Highlights:

  • Revenue: $589.6 million vs analyst estimates of $568.3 million (3.8% beat)
  • EPS (non-GAAP): $0.44 vs analyst estimates of $0.44 (small beat)
  • Revenue Guidance for Q1 2024 is $589 million at the midpoint, roughly in line with what analysts were expecting
  • Management's revenue guidance for the upcoming financial year 2024 is $2.57 billion at the midpoint, missing analyst estimates by 0.8% and implying 20.5% growth (vs 27.3% in FY2023)
  • Management's operating income guidance for the upcoming financial year 2024 is $545 million at the midpoint, missing analyst estimates by 2.1%
  • Free Cash Flow of $201.3 million, up 45.7% from the previous quarter
  • Customers: 3,190 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 82.2%, up from 79.4% in the same quarter last year
  • Market Capitalization: $44.31 billion

Named after a database the founders had to painstakingly look after at their previous company, Datadog (NASDAQ:DDOG) is a software-as-a-service platform that makes it easier to monitor cloud infrastructure and applications.

Founded in 2010, Datadog was designed to help companies that were then just starting to move from legacy on-premise servers to hosting their systems in the cloud. Because the rate of deployment of software increased from weeks to days and hours, the engineering teams needed a way to observe their cloud infrastructure in real-time.

Datadog seamlessly integrates into a company’s tech stack and pulls all the metrics that matter for different cloud services and databases and makes them available in a single real-time dashboard. The shared dashboard then makes it easy for different teams in the company to collaborate when investigating why a service broke down or became really slow.

Cloud Monitoring

Software is eating the world, increasing organizations’ reliance on digital-only solutions. As more workloads and applications move to the cloud, the reliability of the underlying cloud infrastructure becomes ever more critical and ever more complex. To solve this challenge, companies and their engineering teams have turned to a range of cloud monitoring tools that provide them with the visibility to troubleshoot issues in real-time.

Cloud infrastructure monitoring is becoming a competitive space and Datadog is competing with offerings from New Relic (NYSE:NEWR), Elastic (NYSE:ESTC), Splunk (NASDAQ:SPLK), monitoring tools made by the cloud providers themselves and up and coming startups.

Sales Growth

As you can see below, Datadog's revenue growth has been impressive over the last two years, growing from $326.2 million in Q4 FY2021 to $589.6 million this quarter.

Datadog Total Revenue

This quarter, Datadog's quarterly revenue was once again up a very solid 25.6% year on year. On top of that, its revenue increased $42.11 million quarter on quarter, a solid improvement from the $38.08 million increase in Q3 2023. Thankfully, that's a slight re-acceleration of growth.

Next quarter's guidance suggests that Datadog is expecting revenue to grow 22.3% year on year to $589 million, slowing down from the 32.7% year-on-year increase it recorded in the same quarter last year. For the upcoming financial year, management expects revenue to be $2.57 billion at the midpoint, growing 20.5% year on year compared to the 27.1% increase in FY2023.

Large Customers Growth

This quarter, Datadog reported 3,190 enterprise customers paying more than $100,000 annually, an increase of 60 from the previous quarter. That's a bit fewer contract wins than last quarter and quite a bit below what we've typically observed over the past four quarters, suggesting that its sales momentum with large customers is slowing.

Datadog customers paying more than $100,000 annually


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Datadog's gross profit margin, an important metric measuring how much money there's left after paying for servers, licenses, technical support, and other necessary running expenses, was 82.2% in Q4.

Datadog Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.82 left to spend on developing new products, sales and marketing, and general administrative overhead. Significantly up from the last quarter, Datadog's excellent gross margin allows it to fund large investments in product and sales during periods of rapid growth and achieve profitability when reaching maturity.

Cash Is King

If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills. Datadog's free cash flow came in at $201.3 million in Q4, up 109% year on year.

Datadog Free Cash Flow

Datadog has generated $597.5 million in free cash flow over the last 12 months, an eye-popping 27.8% of revenue. This robust FCF margin stems from its asset-lite business model, scale advantages, and strong competitive positioning, giving it the option to return capital to shareholders or reinvest in its business while maintaining a healthy cash balance.

Key Takeaways from Datadog's Q4 Results

We were happy to see that Datadog's revenue and operating income outperformed Wall Street's estimates in the quarter. On the other hand, its new large contract wins slowed. Looking ahead, both full-year revenue guidance and full-year operating income guidance missed Wall Street's estimates. Overall, this was a mixed quarter for Datadog with the outlook weighing on shares. The company is down 14.4% on the results and currently trades at $115.5 per share.

Is Now The Time?

When considering an investment in Datadog, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

There are several reasons why we think Datadog is a great business. While we'd expect growth rates to moderate from here, its . Additionally, its customers are increasing their spending quite quickly, suggesting they love the product, and its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Datadog's price-to-sales ratio based on the next 12 months of 18.5x indicates that the market is definitely optimistic about its growth prospects. And looking at the tech landscape today, Datadog's qualities stand out. We like the stock at this price, even more so considering the company is actually trading at a multiple .

Wall Street analysts covering the company had a one-year price target of $131.78 per share right before these results (compared to the current share price of $115.50), implying they saw upside in buying Datadog in the short term.

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