Datadog (DDOG)

Cloud monitoring software company Datadog (NASDAQ:DDOG) announced better-than-expected revenue in Q1 CY2025, with sales up 24.6% year on year to $761.6 million. Guidance for next quarter’s revenue was optimistic at $789 million at the midpoint, 2.5% above analysts’ estimates. Its non-GAAP profit of $0.57 per share was 34.4% above analysts’ consensus estimates.

Company Overview

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.

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.

A company’s long-term sales performance can indicate its overall quality. Any business can have short-term success, but a top-tier one grows for years. Luckily, Datadog’s sales grew at an excellent 33.4% compounded annual growth rate over the last three years. Its growth surpassed the average software company and shows its offerings resonate with customers, a great starting point for our analysis.

This quarter, Datadog reported robust year-on-year revenue growth of 24.6%, and its $761.6 million of revenue topped Wall Street estimates by 2.8%. Company management is currently guiding for a 22.3% year-on-year increase in sales next quarter.

Looking further ahead, sell-side analysts expect revenue to grow 17.5% over the next 12 months, a deceleration versus the last three years. Despite the slowdown, this projection is noteworthy and implies the market sees success for its products and services.

Billings is a non-GAAP metric that is often called “cash revenue” because it shows how much money the company has collected from customers in a certain period. This is different from revenue, which must be recognized in pieces over the length of a contract.

Datadog’s billings punched in at $747.7 million in Q1, and over the last four quarters, its growth was impressive as it averaged 22.2% year-on-year increases. This alternate topline metric grew slower than total sales, meaning the company recognizes revenue faster than it collects cash - a headwind for its liquidity that could also signal a slowdown in future revenue growth.

This quarter, Datadog reported 3,770 enterprise customers paying more than $100,000 annually, an increase of 160 from the previous quarter. That’s quite a bit more contract wins than last quarter and quite a bit above what we’ve observed over the previous year. Shareholders should take this as an indication that Datadog’s go-to-market strategy is working well.

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Datadog is extremely efficient at acquiring new customers, and its CAC payback period checked in at 20.5 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Datadog more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments.

Software is eating the world. It’s one of our favorite business models because once you develop the product, it usually doesn’t cost much to provide it as an ongoing service. These minimal costs can include servers, licenses, and certain personnel.

Datadog’s robust unit economics are better than the broader software industry, an output of its asset-lite business model and pricing power. They also enable the company to fund large investments in new products and sales during periods of rapid growth to achieve outsized profits at scale. As you can see below, it averaged an excellent 80.1% gross margin over the last year. That means Datadog only paid its providers $19.86 for every $100 in revenue.

This quarter, Datadog’s gross profit margin was 79.3%, marking a 2.7 percentage point decrease from 82% in the same quarter last year. Datadog’s full-year margin has also been trending down over the past 12 months, decreasing by 1.3 percentage points. If this move continues, it could suggest a more competitive environment with some pressure to lower prices and higher input costs.

Datadog has done a decent job managing its cost base over the last year. The company has produced an average operating margin of 1.1%, higher than the broader software sector.

Analyzing the trend in its profitability, Datadog’s operating margin might fluctuated slightly but has generally stayed the same over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q1, Datadog generated an operating profit margin of negative 1.6%, down 3.6 percentage points year on year. Since Datadog’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

If you’ve followed StockStory for a while, you know 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 has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging 29.4% over the last year.

Datadog’s free cash flow clocked in at $244.4 million in Q1, equivalent to a 32.1% margin. This result was good as its margin was 1.5 percentage points higher than in the same quarter last year. Its cash profitability was also above its one-year level, and we hope the company can build on this trend.

Over the next year, analysts predict Datadog’s cash conversion will fall. Their consensus estimates imply its free cash flow margin of 29.4% for the last 12 months will decrease to 25.8%.

One of the best ways to mitigate bankruptcy risk is to hold more cash than debt.

Datadog is a profitable, well-capitalized company with $4.45 billion of cash and $1.88 billion of debt on its balance sheet. This $2.57 billion net cash position is 7% of its market cap and gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

This was a 'beat and raise' quarter. We enjoyed seeing Datadog accelerate its new large contract wins this quarter, leading to a revenue beat. We were also glad its revenue guidance for next quarter exceeded Wall Street’s estimates. For the full year, the company raised its revenue and EPS guidance, although the latter was just in line with Wall Street’s estimates. Overall, this print wasn't perfect but had some key positives. The stock traded up 4.4% to $110.40 immediately following the results.

Updated: May 21, 2025 at 10:18 PM EDT

Before making an investment decision, investors should account for Datadog’s business fundamentals and valuation in addition to what happened in the latest quarter.

Datadog is an amazing business ranking highly on our list. First of all, the company’s revenue growth was impressive over the last three years. And while its forecasted free cash flow margin suggests the company will ramp up its investments next year, its bountiful generation of free cash flow empowers it to invest in growth initiatives. Additionally, Datadog’s ARR has surged, showing its fundamentals are improving because it’s becoming a more predictable business.

Datadog’s price-to-sales ratio based on the next 12 months is 12.3x. Looking across the spectrum of software companies today, Datadog’s fundamentals shine bright. We like the stock at this price.

Wall Street analysts have a consensus one-year price target of $135.55 on the company (compared to the current share price of $114.06), implying they see 18.8% upside in buying Datadog in the short term.

Want to invest in a High Quality big tech company? We’d point you in the direction of Microsoft and Google, which have durable competitive moats and strong fundamentals, factors that are large determinants of long-term market outperformance.

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