Shareholders of Datadog would probably like to forget the past six months even happened. The stock dropped 29.6% and now trades at $88.09. This might have investors contemplating their next move.
Following the drawdown, is now a good time to buy DDOG? Find out in our full research report, it’s free.
Why Are We Positive On Datadog?
Named after a database the founders had to painstakingly look after at their previous company, Datadog (NASDAQ: DDOG) is a software-as-a-service platform that makes it easier to monitor cloud infrastructure and applications.
1. ARR Surges as Recurring Revenue Flows In
While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (ARR) is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.
Datadog’s ARR punched in at $3.10 billion in Q4, and over the last four quarters, its year-on-year growth averaged 29.3%. This performance was fantastic and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes Datadog a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue. 
2. Customer Acquisition Costs Are Recovered in Record Time
The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.
Datadog is extremely efficient at acquiring new customers, and its CAC payback period checked in at 19 months this quarter. The company’s rapid recovery of its customer acquisition costs indicates it has a highly differentiated product offering and a strong brand reputation. These dynamics give Datadog more resources to pursue new product initiatives while maintaining the flexibility to increase its sales and marketing investments. 
3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Datadog has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging 28.9% over the last year.
Final Judgment
These are just a few reasons why Datadog ranks highly on our list. With the recent decline, the stock trades at 9.8× forward price-to-sales (or $88.09 per share). Is now a good time to initiate a position? See for yourself in our in-depth research report, it’s free.
Stocks We Like Even More Than Datadog
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