Bank of America analysts defended one software company whose shares have fallen in recent weeks.
Datadog (NASDAQ:) reported fiscal first quarter 2024 financial results that beat Wall Street expectations.
The surveillance and security firm reported first-quarter net income of $42.6 million, or 12 cents per share, compared with a net loss of $24.1 million, or 8 cents per share, a year ago.
Datadog reported adjusted earnings of 44 cents per share, beating the FactSet consensus estimate of 34 cents.
Revenue rose to $611 million, up 27% from the previous year, compared with analysts’ forecast of $590 million.
However, the company’s shares fell more than 10% after the publication.
“We learned that revenue growth of 27% in 1Q24 YoY was not enough to catalyze growth. However, there is a lot to like in the results, which supports our long-term bullish thesis,” Bank of America analysts commented.
“First, remaining performance obligations (RPO), a good indicator of long-term commitments to customers, increased 52% year-over-year. This, along with comments on major deals, suggests Datadog will benefit from artificial intelligence (AI) and digital transformation in the long term,” they added.
However, BofA cautions that the risk/reward scenario may remain balanced until the company moves from “should benefit from AI” to “actually benefit from AI.”
The bank said the most notable surprise in the report was that Datadog’s new net annual recurring revenue (ARR) was the highest since the fourth quarter of 2021.
This is especially important given that ARR is considered one of the most reliable growth prospects in the software industry.
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Analysts estimate Datadog’s ARR grew 27% year over year, accelerating from its previous growth rate of 24%. They expect ARR growth to continue to exceed the infrastructure peer average of 15% over the medium term.
“Some may be fixated on why AI as a percentage of total ARR isn’t growing faster (a metric that primarily focuses on AI companies like OpenAI),” Bank of America analysts commented.
“However, the true driver of AI growth for Datadog will be when non-AI companies deploy AI applications at scale,” they continued.
Currently, most generative AI workloads involve training and proof of concept. As AI applications are deployed and inference workloads expand, Datadog will benefit, according to the BofA team.
Analysts reiterated their Neutral rating on DDOG and lowered their 12-month price target from $144 to $143.
Datadog forecast second-quarter revenue of $620 million to $624 million, with adjusted earnings per share ranging from 34 cents to 36 cents. Analysts tracked by FactSet estimated revenue of $617 million and adjusted earnings per share of 34 cents.