Shares of Datadog (NASDAQ: DDOG) tumbled 11% in July, amidst turbulent market conditions triggered by a global IT outage. Investor sentiment wavered due to uncertainties in the macroeconomic landscape, leading many to reevaluate lofty valuations on growth stocks. Speculation surrounding a potential transformative acquisition further fueled apprehensions in the days leading up to the quarterly financial report in August.
DataDog Caught in the Currents of Market Trends
During mid-July, Datadog experienced a steep decline in tandem with the broader tech sector. An erroneous software update from CrowdStrike (NASDAQ: CRWD) resulted in widespread computer malfunctions across Microsoft’s (NASDAQ: MSFT) operating system. The surge in valuations for tech stocks rode on the crest of renewed optimism for both short-term economic recovery and Artificial Intelligence’s long-term potential. However, heightened valuations exposed tech stocks to increased volatility, with the global IT outage spurring risk-averse investors toward exits.
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Datadog followed the market’s downward trajectory, paralleling the ProShares Ultra QQQ ETF (NYSEMKT: QLD), designed to double the Nasdaq Composite’s daily return.
Uncertainty, Speculation, and Steep Valuations
Datadog’s stock plummeted despite minimal alterations in future revenue and profit forecasts for 2024 and 2025. The decline was primarily fueled by momentum and shifting investor risk preferences.
The primary buzz surrounding Datadog pertained to its purported interest in acquiring GitLab (NASDAQ: GTLB). Reports indicated Gitlab had engaged investment bankers to explore a potential sale, signaling a serious intent. Considering GitLab’s higher forward P/E and price-to-cash-flow ratios compared to Datadog, the perceived value of acquired cash flows was poised to decrease upon the transaction. Closing the value gap would necessitate time and precision in execution.
The convergence of services appears favorable on paper but poses a costly risk. Amid prevalent uncertainties, Datadog’s high forward P/E ratio, nearing 70 ahead of its quarterly earnings disclosure, signified investor expectations for continued robust revenue growth, previously exceeding 30%.
In times of diminished risk tolerance, growth stocks tend to reel under negative market shifts. All eyes are now on Datadog’s upcoming quarterly report to ascertain if it can counter or perpetuate the macro-induced trends that dictated July’s market performance.
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Ryan Downie holds positions in Microsoft. The Motley Fool has positions in and recommends CrowdStrike, Datadog, GitLab, and Microsoft. The Motley Fool suggests options including long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool upholds a disclosure policy.