Why Datadog's newest bull says its stock is poised to rally

By Emily Bary

Datadog has the potential to expand into adjacent markets and benefit from the AI trend, according to an Evercore ISI analyst

Datadog Inc. shares haven't done much this year, but Evercore ISI thinks they're primed for a rally.

Analyst Kirk Materne initiated coverage of Datadog's stock (DDOG) on Monday with an outperform rating and $150 target price. His target implies 17% upside from Friday's close.

In Materne's view, Datadog "has matured to a point (and grown into its valuation) so that it can become a more consistent compounder over the next 12 to 24 months."

He's looking past the upcoming earnings report as a potential catalyst, since the software company is known to give conservative guidance and investors haven't seem particularly enthused about software stocks lately.

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"However, when taking a view to [second half] and beyond, we believe the risk/reward skews to the upside based on the potential for upside to estimates, the continued expansion of [Datadog's total addressable market], and optionality around its new AI offerings," Materne said.

Datadog shares were up 1.2% in Monday afternoon trading.

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Materne is upbeat about what the artificial-intelligence trend ultimately can do for Datadog, which offers observability software products that let customers monitor their technology stacks.

Generative AI "will create the need to analyze more data across morelayers of the [information-technology] stack and this should play into [Datadog's] platform strategy," he wrote. "While [generative AI is] not a near-term catalyst, we believe it could serve as an additional vector of growth over the long term."

More immediately, he likes the company's "strength in observability and its platform architecture." Those factors could allow Datadog to move into related total addressable markets, including security and analytics, to the benefit of long-term growth prospects.

Overall, he sees upside to his own estimates and the consensus view once consumption levels stabilize and Datadog packs more benefits from customers who employ a number of its products.

Materne noted that his $150 target price is based on a 13x multiple of enterprise value to 2026 revenue. That's "in line with other large-cap high-growth names and assumes some potential upside to both our revenue and [operating-margin] assumptions."

Datadog sares are up 3% over the past three months, and they're ahead nearly 7% on a year-to-date basis. The S&P 500 SPX is up 11% and 18% over those respective spans.

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-Emily Bary

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07-15-24 1442ET

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