With interest rate cuts set to begin this September in the U.S., the time is ripe to increase exposure to quality tech stocks. The bull market that began in early 2023 was primarily driven by mega-cap stocks in the artificial intelligence segment. This means several other growth stocks trade at a discount to their all-time highs and should generate outsized gains if the bull market continues to extend.
One such tech stock that trades south of the border is Datadog (NASDAQ:DDOG). Valued at US$40 billion by market cap, Datadog trades 40% below all-time highs. Canadians should consider investing in quality U.S. stocks, given the country is the world’s largest economy. Moreover, the strategy offers you portfolio diversification, reducing overall risk.
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An overview of Datadog
Datadog offers a cloud-based observability and security platform for enterprises. It is a SaaS (software-as-a-service) entity that provides companies with a portfolio of solutions that include infrastructure and application performance monitoring, log management, digital experience monitoring, database monitoring, application security management, and much more.
Datadog stock went public in September 2019 and has more than tripled investor returns in the last five years.
A growing addressable market
Datadog is part of a rapidly expanding addressable market, which should allow it to grow revenue, earnings, and free cash flow at a steady rate in the upcoming decade. It expects cloud IT spending to surpass US$1 trillion by 2027, accounting for 18% of total IT spending. In 2023, cloud-based IT spending was less than US$600 billion.
According to a report from market research company Gartner, the public cloud services market is estimated to grow by 20% annually through 2027. Gartner also expects the cloud observability market to expand by 11% and the cloud security market to rise by 16% annually between 2023 and 2027.
Datadog’s strong financials
In addition to an expanding market, Datadog will benefit from multiple secular tailwinds, including enterprise digital transformation and cloud migration. Further, the increased penetration of cloud and next-generation customers, as well as expanding use cases, should drive revenue growth in the future.
Datadog reported sales of US$363 million in 2019 and is forecast to report revenue of US$2.6 billion this year, indicating an annual growth rate of 48%. Its customer base has grown from 10,536 in 2019 to 28,000 in the first quarter (Q1) of 2024.
Generally, SaaS companies increase sales by focusing on expanding the customer base and increasing customer spending over time.
Between 2019 and 2023, the number of customers spending at least US$1 million in annual sales on the Datadog platform rose from 54 to 396. Additionally, 35% of customers used at least four products in Q1 of 2022, and this number has risen to 47% in Q1 of 2024. In the last two years, the percentage of customers using at least eight products has risen from 2% to 10%.
Finally, Datadog ended Q1 with a net-dollar-based retention rate of 110%, which means existing customers increased spending by 10% in the last 12 months.
Datadog’s free cash flow in the last 12 months stood at US$668 million, indicating a margin of 30%. This shows that Datadog is generating enough cash to reinvest in innovation, organic growth, and acquisitions. Analysts, too, remain bullish on DDOG stock and expect it to surge over 20% in the next 12 months.
