Just when investors were starting to wonder if shares of Datadog Inc (NASDAQ: DDOG) were doomed to fall back to their pre-summer lows, the tech company delivered a strong earnings beat that completely reversed the trend.
In last week's report, both headline numbers were higher than analysts had expected, while the company's forward guidance was well ahead of the consensus. In a nutshell, it gave Wall Street every reason to think the worst-case scenario or no or slow growth, which had been mostly priced into shares, would not come to pass. And considering Datadog's stock had fallen more than 30% since July as investors grew increasingly pessimistic, there's been a whole lot of revaluing to be done.
Strong reaction
So it won't be a surprise to learn that their shares gapped up as much as 30% the day the report came out, and they've only gone higher since then. As of Tuesday's close, they were up a full 37% from their pre-earnings levels, with shares rallying all the way to the closing bell, a sign of strong momentum on the bid, which is an uber-bullish short-term signal.
In the wake of the report, the team over at JP Morgan was quick to boost their rating on Datadog shares, moving them from Neutral to Overweight. Analyst Mark Murphy leaned into the narrative that the company's shares got caught up in the doom and gloom of weak forward guidance from previous reports, a trend that last week's report completely reversed.
At the same time, they slapped a fresh price target of $115 onto the stock, which should easily be doable this week. That would put shares within a whisker of a fresh 52-week high, and with that kind of momentum behind them, it's not hard to see them pushing on all through.
Some risks remain
Part of the strong snapback we're currently seeing is likely due to short positions unwinding, such as the negative pressure being heaped on Datadog in recent weeks. This is good for those of us considering getting involved now, but it's also a word of caution, as some of the concerns remain valid.
Baird, for example, noted two weeks ago that while the long-term outlook remains promising, some macro headwinds that have plagued the stock are likely to continue into next year. On the back of this, they downgraded shares from Outperform to Neutral, a move that echoed that by Bank of America in the middle of last month. In addition to concerns around the broader macro environment and the cloud vertical specifically, Bank of America raised a few concerns about Datadog's valuation.
At the time, they were trading at 13.2 times enterprise value to estimated revenue and 62.9 times enterprise value to estimated cash flow. Compared to their peers, such as Splunk Inc. (NASDAQ: SPLK) and Dynatrace, Inc. (NYSE: DT), these are 100% and 70% premiums. Last week's results will have narrowed the gap considerably, but it's still something to keep in mind, especially if shares lose momentum or the macro environment worsens.
Getting involved
But all things considered, it would take a lot for that to happen right now. The broader equity market has been rallying hard for the past fortnight, with the S&P 500 index logging its best winning streak in two years. Yesterday saw it close at its highest level since September while giving investors its best single day since April, off the back of October's CPI lower-than-expected reading.
If inflation has truly been beaten, or if it is at least destined to continue cooling for the coming quarters, then stocks like Datadog, which suffered so much when it was rampant last year, stand to do well from its retreat. Sure, its RSI is getting a bit hot around 70, but this is what it looks like when a complete reappraisal of a stock's price has to happen. Last quarter's earnings and the company's forward guidance, coupled with the broader risk-on sentiment sweeping markets right now, are all forcing just that.
