We came across a bearish thesis on Datadog, Inc. (NASDAQ:DDOG) on ValueInvestorsClub by differentiatedfractal31415. In this article, we will summarize the bears’ thesis on DDOG. The company’s shares were trading at $130.63 when this thesis was published, vs. the closing price of $91.88 on Apr 14.
A team of Information Technology professionals creating complicated algorithms at their desks.
DDOG is an observability and security platform for cloud applications. Its products comprise infrastructure and application performance monitoring, log management, digital experience monitoring, continuous profiler, database monitoring, data observability, universal service monitoring, network monitoring and many more.
The recent earnings for DDOG did not present an optimistic picture with the guidance for 2025 being muted compared to its historical performance. The topline growth of 18.7% is construed as conservative by the bulls, but even an optimistic assumption should yield growth in the mid-20s. The management has highlighted the importance of R&D and sales & marketing in sustaining growth and so the expectations of a better margin are also far-fetched. DDOG must expand to geographies and markets that are highly competitive and may have to compromise on pricing to bring in more revenue. A stagnation in the growth of its $1+ million Annual Recurring Revenue (ARR) is a testimony to the intense competition DDOG faces and how higher pricing may no longer be sustainable in the long run.
Another cause for concern is the wavering Net Revenue Retention, especially from its non-AI business. Ex-AI ARR growth was 21% y-o-y in Q4-24 which is lower than the overall business growth of 25%. Challenges posed by Cribl and other companies should limit the NRR and create a dent in how DDOG grows. Even the AI business faces risks like pricing reset and relying on in-house development for infrastructure monitoring due to DDOG’s higher pricing. It is estimated that DDOG charges 150 times more than AWS for providing better flexibility but compromising on performance.
The uncertainty in NRR from large AI-native clients and mounting competition should warrant a valuation of 10x EV/2025E sales and 40x EV/2025E FCF. Using these multiples, the fair value of DDOG should be $100. After sustained pressure in the stock price, DDOG is currently trading 8% below this level.
While we acknowledge the potential of DDOG as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than DDOG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.
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