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Shares of Datadog (NASDAQ: DDOG) are up more than 20% this week after the data analytics platform provider announced strong third-quarter 2023 results and raised its full-year outlook.

Datadog’s quarterly revenue climbed 25% year over year to $547.5 million, translating to non-GAAP (adjusted) earnings of $0.45 per share. Both metrics easily outpaced analysts’ consensus estimates, which called for earnings of $0.34 per share on revenue of $524.2 million.

Delving deeper into those results, Datadog enjoyed continued strength with large customers; the number of customers generating annual recurring revenue (ARR) of at least $100,000 increased 20% year over year to 3,160. Datadog also remains comfortably cash flow positive, generating operating cash flow and free cash flow during the quarter of $152.8 million and $138.2 million, respectively.

But considering this week’s pop effectively brings Datadog stock back to levels we last saw prior to its second-quarter report in August — when shares plummeted after management lowered its 2023 guidance — does that mean it’s officially out of the doghouse?

As a years-long shareholder, I think so. Here’s why.

On Datadog’s previous guidance reduction

Recall back in August, Datadog management was clear in stating that their guidance relied on conservative assumptions for usage growth from existing customers.

In fact, CFO David Obstler even reminded investors during the company’s second-quarter conference call that its “guidance philosophy is to carry forward trends observed in recent quarters, discounted with additional conservatism.”

That’s fair enough. It’s better to under-promise and overdeliver than the other way around, after all. With the brutal combination of macroeconomic uncertainty with recent trends of existing customers focusing on cloud optimization rather than deploying additional workloads, it was hard to blame the company for taking a conservative stance and modestly lowering its previous guidance.

That market didn’t see it that way, of course, as shares of Datadog subsequently plunged in response. Heck, one Wall Street analyst even went out on a limb to downgrade Datadog stock a few weeks ago, citing possible demand headwinds, competitive threats, and the likelihood that AI tailwinds may start to subside in the coming quarters.

On Datadog’s freshly raised outlook

Looking ahead to the rest of the year, Datadog now expects 2023 revenue to be between $2.103 billion and $2.107 billion, with adjusted earnings of between $1.52 and $1.54. Both ranges marked significant increases from its previously reduced outlook (issued in August), calling for revenue of between $2.05 billion and $2.06 billion and earnings per share between $1.30 and $1.34. The new ranges also represent a big increase from Datadog’s earlier 2023 guidance (issued in May 2023), which targeted revenue between $2.08 billion and $2.10 billion and per-share earnings of between $1.13 and $1.20.

So, what changed in the past three months that left Datadog management confident enough to bolster their previously reduced outlook to this extent?

First and foremost, Datadog’s value proposition increasingly appears to be too good to pass up.

In the third-quarter press release, for example, Datadog co-founder and CEO Olivier Pomel credited the company’s outperformance to a combination of “robust new logo bookings, and a continued focus on solving our customers’ DevSecOps [Development, Security, and Operations] pain points.”

“Companies across all industries and sizes are building cloud applications and services to deliver positive business outcomes, including more users, higher revenue growth, improved productivity, and cost savings,” Pomel said. “With our unified, cloud-native, end-to-end observability and security platform, Datadog is uniquely positioned to help our customers reach their goals.”

What’s next for Datadog investors?

Better yet, during Datadog’s subsequent earnings conference call, Pomel stated that the company is finally “seeing signs that the cloud optimization activity from some of our customers may be moderating.”

That’s not to say those optimization headwinds have completely subsided. But stabilized usage throughout Q3 for older customers is being nicely complemented by growth from new logo bookings. As Datadog continues to implement its effective land-and-expand model, additional growth from those new logos should only continue to offset future optimization challenges.

In the end, it’s worth remembering that Datadog management also insists that we’re still in the earliest stages of big tech companies’ cloud transformations. As one of the best-positioned businesses to facilitate those transformations, I think Datadog remains one of the most exciting tech stocks our market has to offer.

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Steve Symington has positions in Datadog. The Motley Fool has positions in and recommends Datadog. The Motley Fool has a disclosure policy.

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