Institutional Support For Datadog Remains High
The outlook for Datadog (NASDAQ: DDOG) is still quite bullish for the long-term but there are near-term headwinds that need to be overcome. The main headwind is insider selling. The selling isn’t something to be worried about but it did help create a downdraft and the short-sellers are taking advantage of it. Insiders, through 118 separate transactions, sold 7.32 million shares worth nearly $1.0 billion in value. That amounts to about 2.2% of the total shares and is related to expiring lockups and share-based compensation.
The key takeaways are that selling has been broad among insiders, periodic, and small on a transactional basis and does not appear to pose a threat or indicate impending doom. In fact, Insidertrades.com data shows the insiders still own about 20% of the company which we think is significant. In addition, the institutions have been scooping up the shares which is another good sign for future share prices. Institutional activity over the past 12 months is worth more than $10.16 billion with a net $3.82 billion in buying. That’s worth another 7.5% of the market cap and puts the institutional holdings at 63%.
The Analysts Are Bullish On Datadog But …
The analysts are bullish on Datadog but the recent trend in sentiment is negative. There have been five major analysts notes released since November and all include a price target decrease and one a rating downgrade. JPMorgan Chase downgraded the stock to Neutral from Overweight and lowered the price target to $195. This compares with the consensus rating of Weak Buy and target of $182 which implies about 37.5% of upside for the stock. The consensus target, it is worth noting, is still up 1.6% over the last 30 days even with the reductions and is up 40% over the last 90 days and 82% over the past year.
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The odd thing is that it’s not the business that has the analysts turning sour. The company is still expected to grow at a high double-digit rate but there is concern the rate-tightening cycle could cause multiple compression among the group. In our view, the 345X earnings multiple is ridiculously high but not tied to the broader software group. Datadog is expected to grow at a 63% YOY rate in the 4th quarter and, with revenues of only $291 million for the quarter, could continue to grow quarterly at a YOY rate above 50% for the next year or more. And that is not counting our expectations for outperformance based on the tailwinds blowing through the eCommerce and digital business world.
A Game-Changing Move For Datadog?
Datadog announced a tie-up with Amazon Web Services that could be a game-changing move for the company. The deal means Datadog will work to develop products in tandem with AWS in order to provide better, more comprehensive, and tailored services to clients. The deal also provides an upsell/co-sell opportunity for both companies that could drive bottom-line results for both.
The Technical Outlook: Datadog Falls To Support
The string of negative analyst coverage and insider selling has shares of Datadog down 34% and they may keep falling but we don’t think so. The price action is sitting on a key support level with strong institutional support and an analyst community that is far more bullish than they may appear. Assuming support holds at the $130 level, we see shares of DDOG moving sideways into the first week or so of February when the company is scheduled to report earnings.
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