Risk/Reward Rating: Negative
Datadog is a technology application monitoring and analytics platform for developers, IT operations teams and business users. The stock became a highflyer in 2020 during the COVID lockdowns and the resulting speculative frenzy in the stock market. During the frenzy, the company’s share price rose 428% over just seven months. The incredible valuation of Datadog resulting from this rally has placed the stock in the doghouse for the foreseeable future.
Valuation: 745x 2021 non-GAAP earnings estimates and 400x non-GAAP 2022 earnings estimates (using the company’s guidance on number of shares outstanding by year end 2021). On a price to sales basis, the company is trading at 42x estimated sales for 2021. Datadog is not profitable on a GAAP basis (generally accepted accounting principles). These valuation metrics are otherworldly and are far outside any historical market norms.
The extreme valuation creates extraordinary risk for new investors. While the company expects excellent revenue growth in 2021 of 47%, this growth rate is likely to decline going forward as the technology sector is fiercely competitive. The slowing growth rate is likely to place extraordinary pressure on any upward stock price momentum. This is evident in the sideways behavior of the shares over the past year (Datadog 1-year daily chart).
Datadog 1-year daily chart
The stock has been churning in a range the past year between $75 and $120. As things stand, there is a clear double top in place at the $120 level separated by four months. A breakdown from this trading range began to occur in May of this year but was rescued by a renewed speculative wave in the markets.
It should be noted that a death-cross occurred on April 12, 2021, when the 50-day moving average pierced beneath the 200-day moving average. When combined with the extraordinary valuation, this is a strong indication that the trend is slowly reversing downward.
Technical resistance: current level up to $120 at all-time highs.
Technical support: $70 is first support. Next lower support is the $50 area which is where the gap higher occurred in May of 2020. The $40 area would be next support which is the initial price range of the stock’s IPO. The valuation suggests these lower levels may be tested at some point.
Datadog 2-year daily chart
Price as of report date 7-9-21: $108
Datadog Investor Relations Website: Datadog Investor Relations
All data in this report is compiled from the Datadog investor relations website and SEC filings, and where applicable publicly available information regarding consensus earnings estimates.