Why Did Datadog (DDOG) Shares Fall Despite Upbeat Q1 Revenues?

Trade Datadog Shares Your capital is at risk
Simon Mugo
Updated: 5 May 2022

Key points:

  • Datadog today reported excellent Q1 results as its revenues surged 83%.
  • However, the company’s margins remained extremely low at just 3%.
  • Investors were also unimpressed by the company’s latest acquisition.

Datadog Inc (NASDAQ: DDOG) today surprised investors with an upbeat Q1 report as it acquired new high-paying customers as demand for its services remained high. The company provides monitoring and security services for cloud applications, and its business has been booming.

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A key highlight was that the cloud services company had attracted about 2,250 customers with annual recurring revenues (ARR) of $100,000 or more, representing a 60% increase from the 1,406 customers on record at the end of March 2021.

The company’s revenues surged 83% to $363 million compared to last year's similar period. Datadog’s GAAP operating margins remained extremely low at just 3%, equivalent to $10.4 million. However, its non-GAAP operating margin was much better at 23%, which translates to $83.7 million.

The company had a decent operating cash flow of $147.4million, of which $129.9 million was free cash flow. The firm had cash and cash equivalents of $1.7 billion on 31 March 2022, a $100 million improvement from the Q4 2021 figure.

Investors were further pleased by DDOG’s Q2 revenue outlook of between $376 million and $380 million, with a non-GAAP operating income of $49 million and $53 million and non-GAAP net operating earnings per share of $0.13 to $0.15.

Datadog also announced in a separate release that it had entered into a definitive agreement to acquire Hdiv Security, a leading provider of security testing software. Datadog intends to add Hdiv’s security capabilities to its Cloud Security Platform to provide a comprehensive suite of security services for various applications.

Hdiv Security’s software monitors the behaviour of applications during runtime to detect both known and unknown security vulnerabilities with extremely high accuracy. These capabilities help developers to assess, track and monitor the risks within running applications.

Developers can easily flag vulnerabilities when and where they matter most and fix them quickly as they emerge.

Investors were largely unimpressed by Datadog’s impressive results and latest acquisition primarily due to its low margins, given that it is a tech company, not a retailer. Tech companies tend to have high margins since they do not sell physical products and have little fulfilment costs.

*This is not investment advice. Always do your due diligence before making investment decisions.

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