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Shares of Datadog (NASDAQ: DDOG) shot up 28% on Nov. 7 following the release of the company’s third-quarter results, which crushed Wall Street’s expectations. It looks like the cloud specialist could sustain its red-hot momentum going forward as well.

That’s because Datadog raised its full-year outlook, suggesting that the demand for its cloud observability and security solutions remains strong. The company’s latest results come as a huge reprieve for investors — Datadog stock was clobbered in August, as the market wasn’t satisfied with its guidance then.

Let’s take a closer look at Datadog’s Q3 performance and check why the stock is likely to head higher.

Datadog’s solid results and guidance point toward healthy customer spending

Datadog’s Q3 revenue increased 25% year over year to $547.5 million, which was well ahead of the $524 million Wall Street estimate. What’s more, Datadog’s non-GAAP earnings nearly doubled year over year to $0.45 per share, crushing the consensus estimate of $0.34 per share.

Datadog’s guidance was the icing on the cake. The company expects Q4 revenue to land at $566 million at the midpoint of its guidance range, along with adjusted earnings of $0.43 per share. Both numbers are well ahead of analysts’ estimates of $0.35 per share in earnings on revenue of $543 million. Even better, Datadog raised its full-year revenue guidance to a range of $2.10 billion to $2.11 billion from the earlier estimate of $2.05 billion to $2.06 billion.

The new guidance implies a year-over-year increase of 25%, but it won’t be surprising to see Datadog delivering stronger growth thanks to the strong demand for its offerings and a massive addressable market. The company exited Q3 with 26,800 customers, an increase of 21% over the year-ago period. More importantly, it witnessed a stronger increase in the number of high-value customers.

The number of Datadog customers with an annualized recurring revenue (ARR) of more than $1 million increased 47% year over year to 317. Meanwhile, the number of customers with an ARR of $100,000 or more was up 20% year over year to 3,130. This improvement in customer spending can be attributed to the adoption of multiple Datadog products by its customers.

For instance, 46% of Datadog’s customers were using four or more of its products in the third quarter, up from 40% in the same period last year. The number of customers using six or more products increased by 5 percentage points year over year to 21%. All this explains why Datadog’s dollar-based net retention rate was slightly below 120% last quarter. This metric compares the ARR of Datadog’s customers in a quarter to the ARR from that same set of customers in the year-ago period, so a reading of more than 100% means that they increased their spending.

Looking ahead, Datadog seems capable of sustaining its solid growth due to a couple of factors.

First, the company expects annual cloud spending to jump to $1 trillion in 2026, double 2022’s estimated spending of $500 billion. This massive jump in global cloud spending means that the spending on cloud observability and security solutions that Datadog sells should increase as well.

This brings us to the second reason why Datadog is built for long-term growth — a nice jump in the company’s total addressable market. The company was sitting on a total addressable market worth $41 billion in 2022, which is expected to jump to $62 billion in 2026.

Faster growth could be in the cards

Datadog is set to sustain a high pace of growth in the coming years, with its 2025 revenue growth expected to be faster than 2024.

DDOG Revenue Estimates for Current Fiscal Year data by YCharts

Additionally, Datadog’s earnings are expected to increase at an annual pace of 32% over the next five years. Assuming Datadog does clock such impressive growth, its earnings could jump to $7 per share in 2028 (using 2023’s estimated earnings of $1.33 per share as the base). The stock is currently trading at an expensive 84 times forward earnings.

Assuming its forward earnings multiple comes down to 26 after five years, in line with the Nasdaq-100 index’s forward earnings ratio, its stock price could jump to $182 after five years based on the projected earnings of $7 per share. That would be a 75% jump from current levels, which is why investors would do well to buy this growth stock before it soars higher.

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Harsh Chauhan has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Datadog. The Motley Fool has a disclosure policy.

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