Why Datadog (DDOG) Shares Are Falling Today

Anthony Lee /
2024/01/02 1:22 pm EST

What Happened:

Shares of cloud monitoring software company Datadog (NASDAQ:DDOG) fell 5.4% in the morning session after the Nasdaq and S&P 500 continued to retreat while the Dow rose slightly. Interest rates rebounded a bit, and investors may be continuing to take profits after a strong calendar 2023. Other than that, we found nothing more specific for the broad move downward. As a reminder, 2023 was a stellar year for the markets, with the S&P 500 surging by almost 25% and the NASDAQ Composite up over 40%. The final month of 2023 was notably strong, marked by a rally in equities and bonds. 

The prevailing theme for 2024 revolves around the narrative of slowing inflation. The Federal Reserve is attempting to orchestrate a soft landing scenario, where inflation comes under control without damaging the economy (in the form of higher unemployment and lower GDP growth, for example). This could hurt overall consumer demand and the markets. As it stands, the market expects a 75 basis points cut in rates throughout the year. Any change in this expectation or narrative could move markets. 

As a reminder, the driver of a stock's value is the sum of its future cash flows discounted back to today. With lower interest rates, investors can apply higher valuations to their stocks. No wonder so many in the investment community are optimistic about 2024. We at StockStory remain cautious, as following the crowd can lead to adverse outcomes. During times like this, it's best to own high-quality, cash-flowing companies that can weather the ups and downs of the market.

The stock market overreacts to news, and big price drops can present good opportunities to buy high-quality stocks. Is now the time to buy Datadog? Access our full analysis report here, it's free.

What is the market telling us:

Datadog's shares are very volatile and over the last year have had 21 moves greater than 5%. In context of that, today's move is indicating the market considers this news meaningful but not something that would fundamentally change its perception of the business. 

The biggest move we wrote about over the last year was about 2 months ago, when the stock gained 22.4% on the news that the company reported an impressive "beat and raise" quarter. Third quarter results blew past Wall Street's expectations for revenue, non-GAAP operating profit and earnings per share. We were also impressed by Datadog's significant improvement in new large contract wins, which helped contribute to the revenue beat. In addition, gross margin improved, and the company continued to generate positive cash flow. Looking ahead, management provided an optimistic outlook as they raised guidance for revenue, non-GAAP operating income, and EPS for the full year, all surpassing consensus estimates. Revenue guidance for the next quarter also exceeded expectations. Overall, it was a fantastic quarter that should have shareholders cheering.

Datadog is down 4.6% since the beginning of the year, and at $115.72 per share it is trading close to its 52-week high of $123.60 from December 2023. Investors who bought $1,000 worth of Datadog's shares at the IPO in September 2019 would now be looking at an investment worth $3,084.

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