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Datadog (NASDAQ:DDOG) recently held its investor day, drawing attention to the potential growth avenues in security and artificial intelligence, according to investment firm Baird.
Despite a 0.5% drop in mid-day trading on Friday, shares have surged more than 59% over the past year.
“The company expects continued strong revenue growth, driven by its land and expand go-to-market motion, and raised its long-term adjusted operating margin target to 25%+ vs. the 23% in 2023,” noted Baird analyst William Power, who has a Neutral rating and $130 price target on Datadog. “Notably, the company seems to be past our previous optimization concerns based on current trends.”
Cloud and Security Opportunities
Datadog’s focus on cloud service management and DevOps presents significant opportunities, particularly as it competes with industry players such as Dynatrace (DT), Splunk (SPLK), and others. The company aims to position itself as an end-to-end decision, action, and automation platform for its customers, as per Power’s analysis.
In the realm of security, Datadog’s potential is still in its early stages, with Security Information and Event Management (SIEM) customers accounting for only 19% of Logs customers. Similarly, the adoption of Datadog’s application monitoring and app security monitoring tools, alongside cloud security management tools, remains relatively low, at 14% and 8% respectively. Power emphasized the company’s advanced observability platform, existing DevOps relationships, and substantial data insights as key competitive advantages.
Furthermore, Datadog stands to benefit from the trend of product and vendor consolidation among companies. Approximately 55% of deals worth $1M or more last year involved some level of consolidation from competitors, resulting in four times higher annualized bookings growth for $1M deals with consolidation compared to those without.
AI Advancements
While Datadog highlighted its advancing prospects in artificial intelligence, it remains early days, with a mere 3% of annual recurring revenue stemming from AI-native customers. The company underscored its Bits AI copilot during the investor event, envisioning AI as a driver for further cloud adoption, as observed by Power.
Financial Targets
During the event, Datadog unveiled new financial targets, including an operating margin goal of 25% or higher, a notable increase from the 20% to 25% range it shared at its initial public offering and the 23% mark it achieved last year. Moreover, it anticipates that free cash flow margins will exceed operating margins for the “foreseeable future,” according to Power’s report.
