Datadog resilient to macro pressures, a top pick at Oppenheimer

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By Sam Boughedda

Oppenheimer analysts highlighted Datadog, Inc. (NASDAQ:DDOG) as a top pick for the firm for 2023 in a research note on Wednesday, while Bernstein analysts released a memo explaining their worries regarding the company's potential FY23 guide.

Oppenheimer explained that their stance on the stock is based on its view that Datadog is relatively resilient to macro pressures given the mission-critical nature of its observability solutions and continues to benefit from selling additional product modules "which should further expand with a move to application/cloud security."

They also said the company will be able to maintain operating margins in the "high-teens" while growing revenue by >30%, and it offered a conservative 4Q22 guide that provides lower downside risk near term. Kidron said the firm views Datadog as a "core long-term holding."

Meanwhile, Bernstein, in its note, questioned if there is a 2023 capitulation risk for Datadog.

"Could FY23 revenue growth pose a re-rating risk? In our October note we explored a recession case, and found it may slow Datadog's growth to ~27-33% YoY at the bottom," wrote the analysts, who have an Outperform rating and $155 price target on the stock.

"Our recession growth model seems in-line to market expectations. Discussions with dozens of leading investors suggested general agreement - they report a similar recession-level growth expectation in their own models. And the sell-side sees ~34% in Q1, dropping to ~32% in Q2-Q3, before rebounding to ~38% in Q4," they added. "Would this imply Datadog is reasonably de-risked into FY23? Not so fast! We did find one potential incremental short-term risk: MARGINS. These same investors largely anticipate flat margins, at worst (we model Q4 15.7% OpM). And the sell-side seems to have a similar expectation, with Non-Gaap OpM in Q1 FY23 at 17.3% rising consistently to 17.9% by Q4."

The analysts concluded that if you believe a recession case is likely, "it may be prudent to wait for a better entry point to what we continue to believe is an attractive investment on a 1+ year time horizon - even in a recession case, given an expected mid-year bottom and rapid pace of rebound."

Datadog shares have fallen almost 3% in Wednesday's session.