Datadog has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 8.3% to $140.11 per share while the index has gained 3.8%.

Is now the time to buy DDOG? Find out in our full research report, it’s free.

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.

1. ARR Surges as Recurring Revenue Flows In

While reported revenue for a software company can include low-margin items like implementation fees, annual recurring revenue (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.

Datadog’s ARR punched in at $2.90 billion in Q3, and over the last four quarters, its year-on-year growth averaged 26.3%. This performance was fantastic 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.

2. Customer Acquisition Costs Are Recovered in Record Time

The customer acquisition cost (CAC) payback period measures the months a company needs to recoup the money spent on acquiring a new customer. This metric helps assess how quickly a business can break even on its sales and marketing investments.

Datadog is extremely efficient at acquiring new customers, and its CAC payback period checked in at 18.7 months this quarter. The company’s rapid sales cycles indicate it has a highly differentiated product offering and a strong brand reputation. These dynamics give Datadog more resources to pursue new product initiatives while maintaining optionality.

3. Excellent Free Cash Flow Margin Boosts Reinvestment Potential

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

Datadog has shown terrific cash profitability, driven by its lucrative business model and cost-effective customer acquisition strategy that enable it to stay ahead of the competition through investments in new products rather than sales and marketing. The company’s free cash flow margin was among the best in the software sector, averaging 29% over the last year.

Final Judgment

These are just a few reasons why Datadog ranks highly on our list, but at $140.11 per share (or 16.4× forward price-to-sales), is now the right time to buy the stock? See for yourself in our comprehensive research report, it’s free.

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