While most leading growth stocks have taken a beating, today's IBD 50 Stocks To Watch pick, Datadog, has bucked the trend and is setting up a new buy opportunity.
Datadog helps businesses build reliable technology infrastructure by detecting, preventing and repairing technology failures. Even though Datadog trades at a rich valuation, with a price to earnings ratio of over 300, the cloud-based cybersecurity stocks has a handful of things going for it.
Namely, the New York-based firm has posted a powerful earnings track record, with an accelerating year-over-year EPS growth over the four quarters of 2021. In the fourth quarter, revenue jumped 84%, to $326.2 million, amid an expanding partnership with Amazon Web Services. Earnings were 20 cents per share on an adjusted basis, up 233% from 6 cents a year earlier. This blew past analyst's expectations of EPS of 11 cents on revenue of $291.5 million.
"We are pleased with our fourth quarter performance, as we demonstrated excellent revenue growth and continued business efficiencies," said CEO Olivier Pomel in the earnings statement.
Earnings, which were reported Feb. 10, caused the stock to jump over 12%.
The Leader In A Lagging Industry Group
On the downside, Datadog is part of the enterprise computer software industry group, which ranks No. 188 of the 197 groups IBD measures.
However, while it's often smart to only focus on stocks in outperforming industry groups, investors may consider exceptions when a particular stock has meaningful business catalysts on its side. For example, Datadog remains a leader in a very specific niche of the cybersecurity sector. It provides mission-critical tools for customers and faces few rivals.
Because Datadog's tools are so vital to its users, customers are willing to pay up for the service. More than 2,000 customers spent over $100,000 with Datadog in its most recently reported quarter. Meanwhile, 216 customers spent over $1 million.
Additionally, the Datadog ecosystem draws in customers to become deeply integrated with multiple products and systems. In an investor presentation from Oct. 27, the company reported that 31% of its customers use four or more products. This makes the business model resilient to customer churn.
Growth Stocks: Datadog Sets Up Buy Point
The leading cybersecurity play has been working on a double-bottom base with 186.38 entry since November, according to MarketSmith. While MarketSmith pattern recognition does not pick up on the pattern, investors can see the first leg of the double-bottom taking shape between November and December, while the second leg formed in January and February.
The high on Dec. 28 marks the double-bottom's buy point. But a handle has formed with a 184.80 buy point. Datadog shares are finding support at the conjoined 50-day and 21-day lines.
The relative strength line has been trending higher since mid-January and remains off new-high levels.
