What happened
Shares of Datadog (NASDAQ: DDOG) rose 10.3% in February, according to data from S&P Global Market Intelligence. The tech stock rose sharply after a strong earnings report early in the month before giving back some of those gains in the market sell-off.
So what
Datadog continues to impress with its operational results. The company reported earnings on Feb. 10, and the news was basically all positive. It boasted 84% revenue growth, positive net profit, and $250 million of free cash flow. This exceeded analyst estimates for both sales and earnings by a wide margin. Datadog also reported great traction with larger customers. It more than doubled the number of subscribers that produce at least $1 million in annual recurring revenue.
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Datadog continues to add new products to a strong suite that's already recognized as a leader in the application performance monitoring industry. That's creating an economic moat as the company's products play an increasingly important role for customers.
Despite all that, volatility still played a massive role here. Since the big bounce on positive earnings, the stock has dropped nearly 20% from its February high. The market downturn is hitting high-valuation tech stocks. Investors can see that even strongly performing businesses won't be spared.
Now what
First-quarter results are a couple of months away, so Datadog stock will be at the mercy of market forces for a while. It's expensive, with a price-to-sales ratio of 45 and forward price-to-earnings ratio near 300. That will most likely fuel high volatility in the near term, especially as the stock market reacts to the conflict in Ukraine and the Federal Reserve continuing to tighten its monetary policy.
That's not necessarily a reason for investors to shy away. This is a classic growth stock with massive potential and an aggressive valuation. Risk and reward are both high relative to other types of stocks. Investors just need to feel comfortable with some potential short-term drops in exchange for the long-term opportunity. It might also be smart to keep some cash on the sidelines in case more shares can be bought at a lower price in the future.
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Ryan Downie has no position in any of the stocks mentioned. The Motley Fool owns and recommends Datadog. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
