Since April 2024, Datadog has been in a holding pattern, floating around $129.15 and posting a small return of 2.9%. The stock also fell short of the S&P 500 index’s 16% return during that time.

Given the weaker price action, are DDOG’s fundamentals still intact?

Check out our full research report for a more comprehensive analysis.

Why Is DDOG a Good Business?

Named after a database the founders had to painstakingly look after at their previous company, Datadog (NASDAQ:DDOG) is a software-as-a-service platform that makes it easier to monitor cloud infrastructure and applications.

Long-Term Revenue Growth Is Remarkable

A company’s long-term performance can give signals about its business quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Luckily, Datadog’s sales grew at an incredible 46.3% compounded annual growth rate over the last three years. This is a great starting point for our analysis because it shows Datadog’s offerings resonate with customers.

ARR Surges as Recurring Revenue Flows In

Investors interested in Datadog should track its annual recurring revenue (ARR) in addition to reported revenue. While reported revenue for a SaaS company can include low-margin items like implementation fees, ARR is a sum of the next 12 months of contracted revenue purely from software subscriptions, or the high-margin, predictable revenue streams that make SaaS businesses so valuable.

Over the last year, Datadog’s ARR growth has been fantastic, averaging 26.1% year-on-year increases and punching in at $2.71 billion in the latest quarter. This performance was in line with its revenue growth and shows that customers are willing to take multi-year bets on the company’s technology. Its growth also makes Datadog a more predictable business, a tailwind for its valuation as investors typically prefer businesses with recurring revenue.

Customer Acquisition Costs Are Recovered in Record Time

Customer acquisition cost (CAC) payback represents the months required to recover the cost of acquiring a new customer. Essentially, it’s the break-even point for marketing and sales investments. A shorter CAC payback period is ideal, as it implies better returns on investment and business scalability.

Datadog is extremely efficient at acquiring new customers, and its CAC payback period checked in at 18.3 months this quarter. The company’s efficiency indicates that it has a highly differentiated product offering and strong brand reputation, giving it the freedom to invest resources into new growth initiatives while maintaining optionality.