Datadog (DDOG) is a pioneering leader in the Application Performance Monitoring (APM), cloud infrastructure service monitoring/analysis, and related DevSecOps tool software market segments. It carries CFRA’s highest investment rating of 5-STARS, or Strong Buy, reports analyst John Freeman in CFRA Research's flagship newsletter, The Outlook.

We initiated coverage of DDOG last June and reiterate our opinion here, especially for patient, long-term investors focused on the fundamentals. Each of its segments is already at the multi-billion-dollar per year level and growing in the double digits, largely driven by a powerful, long- trend we call “The Rise of Meta-Software,” a more investable derivative of the overall digital transformation trend.

Apologies to readers who may not have read or heard this explanation of the Rise of Meta-Software, but we do think it is such a key revenue growth driver for DDOG that it merits emphasis. The logic behind the Rise of Meta-Software is straightforward: As software continues to substitute for labor and capital in the means of production (i.e., digital transformation), enterprises will need a lot more and a lot better software to handle all of this new, more mission critical software.

Shares of DDOG have been punished, along with most of the software industry over the last 12 months. However, with DDOG shares down 52% trailing-12- month (TTM) as of February 10, substantially more than the 13% decline in the S&P Software Industry Index, maintaining a Strong Buy on a stock like this, of course, requires heightened scrutiny, a reevaluation of the investment case, and reviewing the underlying fundamentals.

Through that process, we have come to believe in the soundness of the investment based on the soundness of DDOG’s business, giving particular attention to the duration of growth, pricing power; customer loyalty; high intrinsic operating leverage, which most purely cloud-based providers possess; and the active realization of that operating leverage.

We see shares as particularly attractive here given the pullback in 2022. While we understand the greater discount and contracting multiples for growth stocks in a high interest rate environment, we maintain that, over the long term, say a two- to four-year period, DDOG is as healthy a software-based business as one can find, with high, long-duration growth decelerating to 44% in 2023 and 38% in 2024, according to our forecast.

Recommended Action: Buy DDOG.

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