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Does Datadog have huge potential?

Datadog in a pocket

Datadog Inc. (NASDAQ: DDOG) is a cloud-based observability, monitoring and security platform for enterprise networks. The computer and technology sector leader helps companies monitor their complete infrastructure inside any application, stack and logs at any scale in real time. 

The scale can include over 10,000 hosts and millions of network flows down to a single transaction. It enables enterprises to collect and analyze data from their complete stack, including databases, servers, containers and cloud services. It released 400 new platform features in 2023 with over 700 turn-key integrations.

Powered by artificial intelligence

The platform's artificial intelligence (AI)-powered anomaly detection provides robust, customizable, actionable alerting and incident management capabilities. 

It utilizes machine learning (ML) driven anomaly detection and forecasting to help companies gain deeper insights into patterns, trends and outliers. The company underscores ease of use as you can perform one-click pivots between metrics, traces and logs to provide the right response to every error and incident. 

Its platform supports Inc. (NASDAQ: AMZN) AWS serverless applications, Microsoft Co. (NASDAQ: MSFT) Azure and Alphabet Inc. (NASDAQ: GOOGL), owned by Google Cloud. It has expanded its strategic partnership with Google to become one of the first Vertex AI platform partners. 

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Consistent quarterly beats

On February 13, Datadog reported fiscal Q4 2023 EPS of 44 cents to beat analyst estimates by a penny. Non-GAAP operating income rose 28% year-over-year (YOY) to $166.7 million with a 28% non-GAAP operating margin. 

Operating cash flow was $220.2 million, with free cash flow of $201.3 million. Datadog ended the quarter with $2.6 billion in cash and cash equivalents. Datadog grew its million-dollar ARR customer base to 396, up from 317 in the year-ago period. Revenues surged 25.6% YOY to $589.65 million, beating consensus analyst estimates for $568.73 million.

Lowball guidance 

Datadog provided mixed guidance for fiscal Q1 2024, with EPS expected between 33 cents to 35 cents versus 39 cents consensus analyst estimates. Revenues are expected between $587 million to $591 million versus $586.80 million estimates.

Shares collapsed from the full-year 2024 EPS guidance of $1.38 billion to $1.44 billion, falling short of $1.77 billion consensus estimates. According to consensus estimates, full-year 2024 revenues should occur between $2.555 billion and $2.575 billion.

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Optimization headwinds subside 

Datadog CEO Olivier Pomel helped to soothe investors' nerves about the guidance during the earnings conference call. Pomel underscored some bullish data points. 

He noted that Datadog's sequential ARR added were net higher in Q4 2023 than the year-ago period as the company signs more multi-year deals. Its enterprise team achieved record annualized bookings in Q4 2023. The company is also planning to ramp up, not lay off, hiring and bolster research and development investments in 2024. Datadog had around 3,190 customers with an ARR of $100,000 or higher, which is up 15% YOY. Adoption was strong as 47% of customers use four or more products, up 42% YOY.

Pomel commented, "We expect them to make sure they are using their cloud efficiently continuously, and we'll keep helping them do that. And we do still see attention to cost in certain parts of our customer base, but overall, we see fewer headwinds than we did a few quarters ago." This means the cost optimization cycle for its customers has bottomed out.

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Daily ascending triangle pattern

The daily candlestick chart on DDOG illustrates an ascending triangle pattern. The ascending trend developed at the $110.70 swing low on January 3. 

It triggered a market structure low (MSL) breakout through $117.04 and rose with each higher low, while the flat-top upper trendline rejected each retest at $138.61. The earnings gap and trap occurred on February 13, as shares fell as low as $123.50 on its earnings report and surged as high as $138.61 on optimism that Datadog was lowballing its forecasts. 

The daily 50-period moving average (MA) support is rising to $123.96. The relative strength index (RSI) is falling toward the 50-band. Pullback support levels are at $123.50, $117.04, $112.59 and $105.86.

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