Acquisition rumors and an costly valuation had been dangerous information for Datadog throughout final month’s tech inventory sell-off.
Shares of Datadog (DDOG 2.44%) slumped 11% in July, in response to knowledge from S&P World Market Intelligence. The inventory struggled with tough market situations associated to a shock world IT outage that weighed on tech shares. Investor danger tolerance is declining due to a cloudy macroeconomic outlook, inflicting some individuals to rethink aggressive valuations on progress shares. Stories of a transformative acquisition within the works contributed to the uncertainty within the weeks main as much as August’s quarterly monetary report.
DataDog was a sufferer of a bigger market development
Datadog took a giant step decrease together with most different tech shares midway via July. A defective software program replace from CrowdStrike (CRWD -0.44%) brought about pc crashes everywhere in the world for computer systems working Microsoft‘s (MSFT -0.29%) working system. Valuations have surged for a lot of tech shares because of renewed optimism about short-term financial restoration and long-term prospects for AI. Aggressive valuations opened the door to volatility, and the world IT outage pushed many delicate traders towards the exit.
IMAGE SOURCE: GETTY IMAGES.
That transfer weighed on Datadog inventory. Its worth chart was remarkably just like the ProShares Extremely QQQ ETF (QLD -2.22%), which seeks to double the each day return of the Nasdaq Composite.
DDOG Whole Return Stage knowledge by YCharts
Clearly, Datadog inventory carried out even worse than the ProShares Extremely QQQ ETF, which is already an exaggerated model of the large-cap tech index. Clearly, one thing else was at play.
Uncertainty, rumors, and an costly valuation
Datadog shares tumbled, though forecasts for its future income and earnings had been basically unchanged. Consensus estimates for 2024 and 2025 barely modified. The transfer decrease was solely right down to momentum and investor danger tolerance.
DDOG EPS Estimates for Subsequent Fiscal 12 months knowledge by YCharts
The most important headlines on Datadog had been associated to reported curiosity in buying GitLab (GTLB 0.35%). Sources say that Gitlab employed funding bankers to handle the method, which signifies that they’re severe about executing the sale. It additionally will increase the probability that a number of credible bidders come to the desk, which drives up the value.
Datadog does not have sufficient money on its steadiness sheet to execute a money transaction, so the corporate must challenge debt or new shares. Furthermore, GitLab has larger ahead P/E and price-to-cash-flow ratios than Datadog, so the worth connected to the acquired money flows will seemingly fall as soon as they alter arms. It’ll take time and execution to shut the hole.
DDOG PE Ratio (Ahead) knowledge by YCharts
The mixture of providers is smart on paper, but it surely’s an costly gamble. Traders aren’t enthusiastic about uncertainty underneath the present circumstances. Datadog’s ahead P/E ratio is almost 70 heading into its quarterly earnings report, implying that traders anticipate it to take care of its current income progress price, which has been over 30%.
When danger tolerance is weak, progress shares are likely to battle on any main headline that is not firmly constructive. Search for DataDog’s ahead commentary in its subsequent quarterly report back to both reverse or prolong the macro-driven developments that dominated in July.
Ryan Downie has positions in Microsoft. The Motley Idiot has positions in and recommends CrowdStrike, Datadog, GitLab, and Microsoft. The Motley Idiot recommends the next choices: lengthy January 2026 $395 calls on Microsoft and brief January 2026 $405 calls on Microsoft. The Motley Idiot has a disclosure coverage.
