DataDog’s Fall Amidst a Larger Market Turndown
Amidst the bustling landscape of tech stocks, DataDog took a significant tumble in July, mirroring many of its industry peers. The catalyst for this downturn stemmed from a faulty software update from CrowdStrike, unleashing waves of computer crashes worldwide, particularly affecting systems running Microsoft’s operating software. The recent period has seen a resurgence in optimism around near-term economic recovery and the long-term potential of AI, sparking a surge in valuations for many tech entities. However, this optimism has also opened the floodgates to increased volatility, a perfect storm that led to a global IT outage, prompting cautious investors to head for the exits.
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In this turmoil, DataDog’s stock experienced a trajectory hauntingly akin to the ProShares Ultra QQQ ETF, itself an amplified reflection of the Nasdaq Composite.
Uncertainty, Speculation, and Evaluations
Despite the constancy of forecasts surrounding DataDog’s future revenue and profit outlook, its stock plummeted. Forecasts for 2024 and 2025 remained essentially unaltered. The downturn was solely attributed to market momentum and fluctuations in investor risk appetite.
Central to the turbulence were reports circulating about DataDog’s potential acquisition of GitLab. Rumors hinted at GitLab’s serious intent to sell, a move that may attract multiple bidders, invariably driving up the asking price. However, DataDog finds itself in a cash-strapped position, potentially necessitating debt issuance or new share offerings to facilitate the acquisition. Moreover, GitLab’s higher forward P/E and price-to-cash-flow ratios in comparison to DataDog imply a reevaluation of the intrinsic value of the acquired cash flows post-sale, a process that may require meticulous execution to bridge valuation gaps.
While the synergy between the two entities seems logical on paper, the financial commitment looms large. Investor sentiment, already jittery due to existing uncertainties, might view this move with skepticism. DataDog’s lofty forward P/E ratio, hovering near 70 before its quarterly earnings release, indicates an expectation from investors for the company to sustain its recent robust revenue growth rate, exceeding 30%.
During periods of waning risk tolerance, growth stocks tend to falter in the face of any headline that lacks unequivocally positive connotations. The forthcoming quarterly report from DataDog is anticipated to either reverse or solidify the macro-induced trends dictating market movements.
Should Investors Bet on DataDog Amidst the Turmoil?
Prior to delving into DataDog stock, it’s prudent to weigh certain factors:
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