Will Wall Street's enthusiasm for Datadog lead to big gains?

Datadog easily beat earnings and revenue views in its latest quarter Wall Street expects strong profit growth for the full year and for 2023 Despite analysts' optimism for the long term, enthusiasm was temporarily dampened as the company only guided in line with expectations

Cloud monitoring specialist Datadog (NASDAQ: DDOG) has been getting analysts excited lately — at least for the most part, according to data compiled by MarketBeat.

MarketBeat.com - MarketBeat

On Friday, Credit Suisse launched a hedge with an "outperform" rating. Earlier in the week, Moffett Nathanson analyst Sterling Auty opened coverage with a “buy” rating and a price target of $143, representing a potential upside of 51.31%. Additionally, middle-market investment bank Robert W. Baird opened coverage for the stock with an “outperform” rating and a target of $120.

The only outlier, in terms of new analyst coverage, was JPMorgan Chase, which started its coverage with a rating of "neutral."

The stock has lost ground since its second quarter release on Aug. 4. The company reported earnings of $0.24 per share, up 167% from the year-ago quarter. That beat the consensus estimate of $0.14 per share, as shown by earnings data from MarketBeat.

Revenue was $406.14 million, well above the consensus estimate of $381.28 million. This is a 74% year-over-year increase.

The company has seen earnings growth of between 80% and 300% over the past five quarters. Revenues have grown at high double-digit rates over the past eight quarters.

In the earnings release, Datadog highlighted several new partnerships and service upgrades. It also noted that it had approximately 2,420 customers with annual recurring revenue of $100,000 or more, a 54% increase from the year-ago quarter.

For the full year, Wall Street expects earnings of $0.80 per share, which would represent a 67% increase. This figure is expected to rise another 34% in 2023, to $1.07 per share.

With all this good news, why did the stock crash?

Obviously, part of the answer is the same for most stocks: concerns about interest rates, inflation, recession, and just a general market decline.

But in Datadog's case, some company-specific information appalled investors: the company's guidance was only in line with expectations rather than exceeding opinion.

Datadog has provided the following guidance for Q3:

Revenues between $410 million and $414 million. Non-GAAP operating profit is between $51 million and $55 million. Non-GAAP net earnings per share between $0.15 and $0.17

For the full year, it provides:

Revenue between $1.61 billion and $1.63 billion. Non-GAAP operating profit is between $255 million and $275 million. Non-GAAP net earnings per share are between $0.74 and $0.81.

For the full year, you can see how net profit has a chance of coming in at the lower end of expectations, which would miss analysts' views.

Nevertheless, Wall Street obviously maintains confidence in the stock, given the optimistic consensus price target of $148.36, a potential upside of 67.26%.

Another sign of optimism, and one that investors can often bring to the bank: institutional ownership has soared in the last quarter.

Institutions own 72% of the shares, which is a strong vote of confidence. The funds hold 52% of the shares. More institutions have bought stocks than sold stocks in the past 12 months.

Why is institutional ownership important? First, investment banks, funds, insurance companies, university endowments, and other large landlords have dedicated research teams to meticulously unearth opportunities.

Second, institutions don't just buy and sell haphazardly. Instead, they tend to rack up positions over time when they have...