Datadog Analyst Highlights Steady Customer Behavior Given Anxiety Over Consumption Drop, Share Pullback

Needham analyst Mike Cikos reiterated a Buy on Datadog, Inc DDOG with a $90 price target.

• Cikos reviewed the set-up for Q4FY22 and FY23 revenue through the lens of Datadog's management team, finding out how Q4FY22 plays out compared to guidance and what likely target Datadog communicates for FY23 revenue growth. 
• The analyst attempted to reverse-engineer this figure based on management's track record of issuing conservative guidance, which Datadog has a high degree of successfully beating and raising throughout the year. 
• Incorporated in Cikos' assumptions is the historical context for how management has typically set initial guidance and additional conservatism, given a less specific macro and broader set of possible outcomes outside management's control. 
• In this exercise, the analyst believes Datadog beat the midpoint of Q4 revenue by ~4%-5% and initiated FY23 revenue guidance for 33%-36% growth.
• Cikos saw the stabilization of customer behavior in Q3 versus Q2 as significant in the context of investor concerns for further degradation into the print. 
• Management noted a healthy growth in existing customers, but slowed usage below Datadog's historical average, similar to Q2. This led to existing customers contributing the same sequential Net New ARR in Q3 as in Q2. 
• Cikos believe the steady customer behavior is positive for Datadog, given investor anxiety about a deterioration in consumption trends and the pullback in shares.
• Management indicated that the lighter consumption compared to Datadog's longer-term trends impacted a broader cut of the portfolio's significant products in Q3. 
• Also, industry-specific comments relayed that Consumer Discretionary sees the most significant impact, consistent with Q2.
• Management discussed strong forward-looking indicators which remain supportive of sustained growth, including strong growth in New Logo ARR, a solid sales Pipeline into Q4, and broadening Platform adoption. 
• Additionally, Churn remains low and Gross Retention is stable. 
• When looking at CY23, the analyst believes previous revenue estimates are too high compared to the guide for Q4. 
• The analyst expects that the Street will utilize Q3 publications to adjust models downward, providing a better set-up into CY23 for upward estimate revisions.

Price Action: DDOG shares traded higher by 1.33% at $76.99 on the last check Wednesday.

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