Shares of Datadog (DDOG -5.23%) are down 19% since the cloud security platform provider issued a weaker-than-expected 2025 outlook with slower revenue growth and higher expenses.
However, there could still be an opportunity in the stock as the company looks to transition from a platform that alerts customers of potential problems to one that takes action and fixes them.
With that in mind, let’s take a closer look at the company’s most recent results and guidance to see if this is a buying opportunity.
Operating margin guidance in focus
The fact that Datadog’s 2025 revenue forecast of 18% to 19% growth came up short of analyst estimates wasn’t a total surprise. The company is operating in a tight enterprise software spending environment, and management tends to be conservative with its guidance. Datadog uses a consumption model, and the company tends to base its forecast on current usage trends, which it then discounts.
However, the bigger surprise was its operating margin guidance of 21% for 2025, which was well below the 25% that analysts were modeling. Datadog is looking to ramp up spending as it makes key investments in sales and marketing to help expand its presence in underserved markets. It will also look to add more salespeople and invest in its go-to-market strategies. On the research and development front, Datadog is focusing on areas such as Flex Logs and cloud management services.
Turning to its Q4 results, Datadog saw revenue climb 25% to $738 million. Management said consumption trends were in line with expectations and stable year over year, with strong usage in October and November, followed by a typical December seasonal slowdown.
Net dollar-based retention, which measures spending growth from existing customers, was in the high-110% range. It ended the year with 30,000 customers, of which 3,610 have annual recurring revenue (ARR) greater than $100,000 and 462 customers who spend more than $1 million. Half of its customers use more than four solutions, while more than a quarter use six or more.
The company highlighted its infrastructure monitoring solution, which now contributes ARR of $1.25 billion, as well as its log management and APM products, which each have more than $750 million in ARR. The company is looking toward cloud security as a growing opportunity too.
Datadog noted that artificial intelligence (AI) native customers were now 6% of its ARR, up from 3% a year ago. It is seeing increased interest in AI inference workloads. As AI inference costs come down and more enterprises develop their own AI capabilities and services, this should be an opportunity for Datadog as these resources will need monitoring.
Adjusted EPS, meanwhile, came in at $0.49, up 11% from $0.44 a year ago. It generated free cash flow of $241 million in the quarter and $775 million for the year.
For the current quarter, the company forecast Q1 revenue of between $737 million and $741 million, representing growth of around 21%. Adjusted EPS should be $0.41 to $0.43.
Is it time to buy the stock on the dip?
While investors were disappointed with Datadog’s guidance, especially on the expense side, increased investments should ultimately be good for the company over the long term. Meanwhile, it has a history of being conservative when it comes to forecasting revenue.
At the same time, the company is seeing a lot of wins. Datadog added the most customers (800) in over a year and a half, and the number of large customers continues to grow. It also saw an uptick in net dollar retention from the previous few quarters.
Longer term, Datadog has a solid opportunity as it looks to use AI to help not just observe problems but to automatically address any threats. It also should benefit as more enterprises look to develop and run their own AI solutions.
Trading at a forward price-to-sales (P/S) multiple of 12.8 times, Datadog’s stock is not cheap given its projected 18% to 19% growth this year.
Data by YCharts.
I wouldn’t step into a declining growth story with a premium valuation due to the elevated downside risk. However, if the stock trades down to a P/S multiple around 10 times, Datadog becomes more appealing.
Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Datadog. The Motley Fool has a disclosure policy.
