Analyst Todd Gordon cautions that AI cloud data stock Datadog (DDOG) is currently ‘priced for perfection.’ Despite strong technicals and impressive revenue growth driven by AI adoption, the stock’s valuation at 108x forward earnings is a significant concern. Gordon suggests a disciplined approach, advising against chasing the rally and recommending adding on pullbacks.
In a recent analysis, Todd Gordon, Founder of Inside Edge Capital, LLC, expressed caution regarding the red-hot AI cloud data stock, Datadog, Inc. (DDOG), suggesting it is currently 'priced for perfection.' Despite its impressive performance, Gordon highlights several factors that warrant a closer look before investors chase the stock.
Datadog, which provides a comprehensive monitoring solution for modern software, has seen its stock surge approximately 94% in the past year, trading around $266. The company's technicals show a strong uptrend, with the stock comfortably above its 50-day and 200-day moving averages and demonstrating relative strength against the broader market. A significant technical pattern, an IBD-style cup and handle, suggests a potential breakout targeting the $300s.
Fundamentally, Datadog's business model, which charges by usage rather than by seat, has led to a net retention rate above 120%. The company recently reported its best quarter ever, with revenue exceeding $1 billion for the first time, up 32%, and annual recurring revenue surpassing $4 billion. The burgeoning AI sector has been a significant accelerant, with Datadog offering GPU monitoring and LLM observability, securing eight-figure deals with hyperscaler AI research divisions, and counting 14 of the top 20 AI-native companies as customers. Its recent FedRAMP High certification also opens doors to government contracts.
However, Gordon points out the significant 'catch': the price. Datadog trades at a steep valuation, around 108 times forward earnings and 10 to 11 times forward sales. The stock has rallied a staggering 140% in just three months and is currently trading about 10% above Wall Street's average price target. Bernstein recently downgraded the stock to 'Market Perform,' citing near-term demand caution. Furthermore, Datadog's GAAP profits remain thin, with much of its net income derived from interest on its cash pile rather than its core operations. Real-world risks also include the concentration of AI revenue in a few large customers, competition from hyperscalers, and a past source code breach.
Gordon's bottom line is that while the trend, pattern, and rising estimates are positive, investors are paying a premium for near-perfection. He advises against chasing the stock at its current levels, instead recommending a disciplined approach by sizing positions carefully, respecting the $201 support level, and adding on pullbacks.
