Datadog Shares Slide as Worries Emerge About Slowing Growth

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Datadog shares are down 4.8% to $107.

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Spurring fresh concerns about the outlook for IT infrastructure spending, Datadog this morning provided an outlook for the second half of the year that disappointed the Street. Combined with a similarly disappointing outlook from the security software provider Fortinet,
investors are growing concerned about the impact on corporate technology spending of the softening macroeconomy.

Datadog (ticker: DDOG), which provides monitoring and security software used to keep tabs on IT infrastructure, had a strong second quarter. Datadog posted revenue of $406.1 million, up 74% from a year ago, and well above both the Street consensus forecast at $381 million and the company’s guidance range of $376 million to $380 million. On an adjusted basis, the company earned 24 cents a share, above both consensus at 15 cents, and the guidance range of 13 to 15 cents a share.

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But there were a couple of wrinkles. The company is projecting third-quarter results in line with estimates, which for a high-growth, high-multiple company like Datadog isn’t quite enough. The company is projecting Q3 revenue of $410 million to $414 million, with non-GAAP profits of 15 to 17 cents a share; Street consensus had been $412 million and 16 cents.

For the full year, the company now sees revenue of $1.61 billion to $1.63 billion, with non-GAAP profits of between 74 and 81 cents a share; that is up from a previous forecast of $1.60 billion to $1.62 billion, and 70 to 77 cents a share. Street consensus had been $1.62 billion and 75 cents a share.

Monness Crespi Hardt analyst Brian White responded to the report by cutting his rating on the shares to Neutral from Buy. White notes that billings fell short of expectations, and that the third-quarter guidance looks cautious. He’s worried that the economic downturn is beginning to affect the company’s outlook. “We believe the combination of the secular cloud trend and accelerated digital transformation initiatives bodes well for long-term demand for Datadog,” he writes. “That said, the economy appears to be in a recession, equity markets are in turmoil, and the geopolitical landscape is daunting.”

RBC Capital analyst Matthew Hedberg pointed out in a research note that billings were $397 million, below consensus at $430.6 million, while deferred revenue at $458.8 million likewise fell short of Street estimates at $512 million.

BTIG analyst Gray Powell wrote in a research note reviewing the results that the guidance for the quarter “will be an issue for most,” pointing out that over the last four quarters, revenue guidance has on average been 8.4% above Street estimates. And he notes that given the strong Q2 revenue beat, the full-year guidance increase was disappointing.

“Our take is that a weak economy is clearly having an impact across both our infrastructure and security software coverage, and it seems to be hitting performance a little earlier than many expected,” Powell writes. “While Datadog is a best in class asset, it is not immune.” For now, he keeps his Buy rating and $175 target, but adds that his estimates are “under review.”

Datadog remains among the most richly priced software stocks, trading for about 19 times enterprise value-to-sales for the next 12 months, slightly ahead of Snowflake and CrowdStrike at 17 times and Cloudflare (NET) at 16 times.

Datadog shares are down 4.8% to $107; Fortinet is off 16%. Both security and enterprise software stocks are selling off Thursday on the two reports, with Palo Alto Networks (PANW) down 6%, CrowdStrike (CRWD) off 5%, Snowflake (SNOW) 2% lower and Elastic (ESTC) 3% lower.

Write to Eric J. Savitz at [email protected]

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Credit: www.marketwatch.com /

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