Shares of Datadog Inc. took a hit on Monday following a cautious note from BofA Securities. The observability software company now faces potential downside revenue risks, according to BofA analyst Koji Ikeda.
In his analysis, Ikeda observed that industry conversations have not indicated any significant improvement in demand. While the situation has not worsened, it also has not shown any notable improvement. As a result, Datadog is expected to maintain a conservative approach to its outlook.
One critical concern is that Datadog is widely perceived as a premium offering. This perception could lead the end-market to turn toward cheaper competitors, native hyperscaler options, or open-source alternatives. It is these factors that could negatively impact revenue, remaining performance obligations, and billings performance.
As a result of these findings, Ikeda downgraded Datadog's stock from buy to neutral on Monday. He ran through various scenarios and concluded that consensus revenue expectations might be too high. In fact, the initial 2024 guidance from Datadog fell below the current consensus in the majority of outcomes.
This cautious assessment raises concerns about the future performance of Datadog's stock. Investors will need to closely monitor the company's strategy moving forward to assess its potential impact on overall revenue and market position.
Datadog Shares Face Premium Pricing, According to Analyst
During Monday's trading session, Datadog shares experienced a 4.3% decline, highlighting the hefty price tag associated with the stock. As observed by Ikeda, the stock is valued at 13.2 times his estimated enterprise value to calendar 2024 revenue, which marks a significant 100% premium compared to other infrastructure software companies. Moreover, the stock's estimated enterprise value to calendar 2024 free cash flow is at a staggering 62.9 times, translating to a 70% premium.
Concerns and Opportunities for Datadog Investors
Addressing potential investors, it is crucial to analyze the historical performance of software stocks. While Datadog continues to offer exceptional products as an innovative end-to-end platform for observability and cloud security, its position as a core holding may face limitations. Conservative demand, fierce competition, and notable AI advancements anticipated in the second half of 2024 are expected to constrain the company's growth potential.
Delayed AI Benefits Impact Stock Evaluation
Ikeda reveals that the anticipated advantages of implementing AI may not materialize as soon as initially predicted. Consequently, he has revised his price target for Datadog shares, lowering it from $123 to $105.
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