Why Datadog Stock Is Slumping Today

What happened

Shares of Datadog (NASDAQ: DDOG) sank on Friday after the company reported fourth-quarter results that beat analyst expectations. The guidance may be the culprit: Datadog is expecting revenue growth to slow substantially in 2021. Shares of the cloud monitoring and security company were down about 3.6% at 11:20 a.m. EST; they had been down as much as 8.2% earlier in the day.

So what

Datadog reported fourth-quarter revenue of $177.5 million, up 56% year over year and about $14 million ahead of analyst expectations. Adjusted earnings per share of $0.06 doubled from the prior-year period and were $0.04 higher than the average analyst estimate.

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The fourth quarter was a bit more sluggish than the rest of 2020. The company booked 66% revenue growth for the full year, bringing the annual total to $603.5 million. Datadog now has 97 customers with annual recurring revenue of $1 million or more, nearly double the count at the end of 2019.

On top of reporting its results, Datadog announced two acquisitions. The company has agreed to acquire software security platform Sqreen and observability data pipeline provider Timber Technologies.

Now what

Datadog's guidance may be what's dragging down the stock. The company expects to report first-quarter revenue between $185 million and $187 million, along with adjusted EPS between $0.02 and $0.03. At the midpoint of those ranges, revenue would be up 42% year over year, while earnings per share would be down substantially from the $0.06 reported for the prior-year period.

For 2021, Datadog expects revenue between $825 million and $835 million and adjusted EPS between $0.10 and $0.14. That's good for revenue growth of 38%, while EPS will be down from the $0.22 reported for 2020.

Datadog is valued at around $35 billion, which works out to over 40 times the revenue guidance for 2021. With a sky-high valuation like that, a growth slowdown is the last thing investors want to see.

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Timothy Green has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Datadog. The Motley Fool has a disclosure policy.

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