Shares of Datadog Inc. were getting hit Monday after BofA Securities came out with a more cautious take on the observability software company, warning of “downside revenue risks.”
BofA’s Koji Ikeda worries that his industry conversations haven’t shown significant improvement in demand. “Our take is that while things have not gotten significantly worse, it has also not gotten significantly better, which leads us to believe that Datadog will continue to take a very conservative approach to its outlook,” he wrote.
What’s more, “Datadog is widely perceived to be a premium offering, which could drive the end-market to lower cost competitors, native hyperscaler offerings, and/or open-source alternatives,” all factors that could weigh on revenue, remaining performance obligations and billings performance.
Ikeda downgraded Datadog’s stock
DDOG,
to neutral from buy Monday, noting that he ran through various scenarios suggesting consensus revenue expectations might be too high. “[I]nitial 2024 guidance falls below the current consensus in the majority of the outcomes,” he wrote.
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Datadog shares, down 4.3% in Monday’s session, also aren’t cheap, according to Ikeda. He flags that the stock trades at 13.2 times his estimates for enterprise value to calendar 2024 revenue, constituting a 100% premium to fellow infrastructure software names. Additionally, the stock trades at 62.9 times his estimated enterprise value to calendar 2024 free cash flow, making for a 70% premium.
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The company’s “premium offering remains best-of-breed as a differentiated end-to-end observability and cloud security platform with customer logo growth likely keeping [Datadog] as a core holding,” he wrote. “However, we view upside as likely capped as conservative demand, competitive threats, and meaningful AI tailwinds likely come in [the second half of 2024], constraining the growth profile.”
Those AI benefits could come later than he initially believed, he wrote, as he lowered his price objective on the stock to $105 from $123.
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