Analysts at Bank of America (NYSE:BAC) have defended a particular software company whose shares have fallen in recent weeks.
Datadog (DDOG) has revealed its financial performance for the first quarter of fiscal year 2024, beating Wall Street analysts' financial expectations.
The cybersecurity and surveillance company reported first-quarter earnings of $42.6 million, or 12 cents per share, an improvement from a loss of $24.1 million, or 8 cents per share, in the year-ago period.
Adjusted for non-recurring items, Datadog's earnings came to 44 cents per share, above the consensus estimate of 34 cents provided by FactSet.
The company's revenue rose to $611 million, up 27% from a year earlier, while analysts had expected $590 million.
Despite these results, the company's share price fell by more than 10% following the announcement.
The 27% year-over-year revenue growth for the first quarter of 2024 wasn’t enough to push the stock price higher. However, the results contain several positive aspects that reinforce our bullish long-term outlook, analysts at Bank of America said.
For example, remaining performance obligations (RPOs), a reliable measure of long-term customer agreements, increased 52% year-over-year. This, coupled with significant contract discussions, suggests that Datadog is likely to benefit from the adoption of artificial intelligence (AI) and digital upgrades over the long term.
However, Bank of America warns that the balance between potential gains and risks may persist until the company evolves from the stage of anticipating the benefit of AI to the stage of effectively benefiting from AI.
The bank highlighted that an unexpected development in the report is that Datadog's new annual recurring revenue (ARR) reached its highest level since Q4 2021.
This is particularly noteworthy because ARR is widely considered a reliable indicator of future growth in the software industry.
Analysts estimate that Datadog’s ARR growth rate has increased by 27% year-over-year, an acceleration from the previous growth rate of 24%. They expect ARR growth to continue to outpace the average growth rate of 15% among infrastructure peers for the foreseeable future.
Analysts at Bank of America commented: “Some may focus on the question of why AI’s share of total augmented annual growth rate isn’t increasing more rapidly (this metric applies primarily to AI-based companies like OpenAI).”
They explained: However, the real growth driver for Datadog's AI will be the widespread adoption of AI applications by companies that are not originally AI-based companies.
Currently, the majority of generative AI workloads are associated with training and early-stage pilot projects. Datadog is expected to benefit from AI applications as AI applications become more widespread and demand for inference processing increases, according to the Bank of America team.
Analysts maintained a Neutral rating on Datadog stock and slightly lowered their 12-month price target from $144 to $143.
For the second quarter, Datadog expects revenue to be between $620 million and $624 million, with adjusted earnings per share expected to be between 34 cents and 36 cents. Analysts surveyed by FactSet had expected revenue of $617 million and adjusted earnings per share of 34 cents.
