Nasdaq Sell: 1 Unstoppable Stock Down 39% to Buy Lower, According to Wall Street

The Nasdaq Composite (^IXIC 0.21%) represents almost all stocks on the Nasdaq stock exchange. It had a dream run in the first half of 2024, gaining 20% ​​with almost no volatility.

That changed in July, and the index is currently down 6.5 percent from its peak as investors digest weak economic data and a currency shock in Japan.

History shows that the US stock market is climbing to new long-term highs, so this dip could be a great buying opportunity. One action that investors may want to consider is Datadog (DDOG -1.16%) for its unique role in the artificial intelligence (AI) revolution.

Shares of Datadog have fallen 9.5% in the past month amid the Nasdaq selloff and now trade 39% below the all-time high set during the tech frenzy of 2021. That hasn’t deterred Wall Street, as the overwhelming majority of analysts. followed by The Wall Street Journal have assigned Datadog the highest possible buy rating. Here’s why he might be right.

Image source: Getty Images.

Datadog technology is crucial to modern business

About 28,700 companies use Datadog’s growing portfolio of software tools, and the company is best known for its cloud monitoring platform, which helps prevent technical errors from disrupting digital infrastructure.

In the past, for example, an e-commerce company may not have known that its website was down for customers in a particular country until it noticed a drop in sales. Now Datadog can alert management instantly so the problem can be fixed before it affects customers.

This is an important tool in the digital economy because the competition is always a click away. Beyond e-commerce, Datadog is popular in industries such as financial services, entertainment, gaming and healthcare, all of which are consumer-centric.

Last year, Datadog released an AI assistant that is now built into its legacy products. It’s called Bits AI, and it helps companies get to the root cause of technical issues much faster.

Bits AI can also produce incident summaries, which save managers countless hours that would otherwise be spent on manual investigations. And if they want to know more, they can initiate a conversation with the assistant for specific details.

Datadog recently ventured even deeper into AI by releasing an observability tool for Large Language Models (LLM), the foundation for AI applications like chatbots and virtual assistants. This makes it crucial that LLMs are accurate and error-free.

The observability tool helps developers monitor costs, diagnose problems with their LLMs, and even measure their quality by tracking responses from the chatbots they power.

AI revenues are growing rapidly

Datadog generated total revenue of $645.2 million during the second quarter (ended June 30), a 27% year-over-year increase that was significantly above management’s estimate of $622 million.

CEO Olivier Pomel said that 4% of Datadog’s revenue was specifically attributed to native AI customers in June, and while that seems like a small number, it doubled from 2% in the last year alone.

Pomel said about 2,500 customers are now using one or more of Datadog’s AI tools, which is about 8.7% of its total customers, so uptake is happening quickly.

Even more impressive, the solid growth of both its legacy and AI businesses is happening even as the company carefully manages costs. Operating expenses rose just 18.5% year over year in the second quarter, compared with 31.2% a year ago, allowing more cash to flow to the bottom line.

As a result, Datadog generated net income of $43.8 million, a big upside from the $3.9 million net loss it posted at the same time last year.

Datadog is proving to investors that it doesn’t need to burn significant cash to generate growth, as there is strong organic demand for its portfolio of monitoring and observability tools.

Wall Street is bullish

The Wall Street Journal tracks 43 analysts covering Datadog, and 29 have assigned it the highest possible buy rating. Another seven are in the overweight (bullish) camp, while the remaining seven recommend holding. No analyst recommends selling.

They have a consensus price target of $144.89 on the stock, up 27% from where it is trading today. The Street-high target is $160, implying a 40% upside.

Those targets may even be conservative, as they’re still far from Datadog’s all-time high of around $193, set during the tech frenzy of 2021. To be clear, the stock was heavily overvalued then at a price-to-sell. ratio (P/S) over 60.

Since then, a falling stock price and solid revenue growth have combined to push the P/S down to 17.8, which is 40% below its average of 29.9 since the company went public now five years.

DDOG PS report data by YCharts.

If AI becomes like the cloud, in that virtually every company in the world will use it in some capacity, then Datadog’s LLM and AI products will be in high demand. If so, the company’s AI revenue will likely represent much more than 4% of total revenue in the near future. Investors have the opportunity to buy shares before this change.