The market’s reaction to the COVID-related disruption has been very harsh and businesses lost several million dollars of market cap in the mass selloff. One sector that managed to weather the slump is technology, supported by the digital transformation wave and rapid adoption of cloud-based services.

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Shares of Datadog, Inc. (NASDAQ: DDOG), a leading provider of monitoring and analytical software, have been on a steady upward trajectory since the onset of the pandemic and hit a record high last week. The surprise rally has brought the stock into the spotlight, leaving the market speculating about its future.

Investing in DDOG

Since the stock looks overvalued at the current price, there will be caution and investors would want to watch the trend until the next earnings, which is scheduled for release on August 10. Moreover, Datadog is not a dividend-paying company and it is unlikely to start paying in the near future.

Going by the target price set by market experts, representing a 17% dip from the current levels, the stock is poised to extend the pullback into the coming weeks. That would still be far above its long-term average and the moderate buy rating justifies the price projection. It needs to be noted that the stock continues to be a favorite among institutional investors.

Betting on Cloud Power

The current trend indicates that the demand for cloud observability solutions will remain strong in the second half when a clearer picture of the virus scenario is expected to emerge. Datadog is better positioned to tap the opportunity than others due to its ability to create effective monitoring solutions for the increasingly complex cloud landscape. That assumes importance considering the management’s plan to expand the business into international markets.

A unique feature of the business model is the focus on establishing coordination between operating teams and development teams with the help of cutting-edge technology. Disruptions in the wider market can influence the business due to its seasonal nature and involvement of third-party cloud infrastructure providers in product hosting.

Competition

Due to the prevalence of digital transformation, the struggle to preserve market share is intensifying and Datadog’s competitors range from tech giants like Microsoft (MSFT) and Cisco (CSCO) to relatively new players such as Elastic N.V. (ESTC) and New Relic, Inc. (NEWR). Meanwhile, the lackluster margin performance and the related stress on profitability would remain a dampener for the company. The near-flat bottom line tends to slip to the negative territory at the slightest deterioration of the operating environment.

The majority of the regular clients are not affected by the market turmoil, which leaves Datadog’s order book intact. That, together with the high retention rate and expanding product portfolio, would keep it busy during the remainder of the year. But the unpredictable backdrop might cause deal cancellations, after a busy first half when the company clinched some key contracts. The company has been making steady progress in expanding the portfolio beyond infrastructure metrics.

Revenues up 87%

The New York-based tech firm, which went public less than a year ago, has reported quarterly profit consistently, defying estimates for negative earnings. In the first quarter, revenues surged 87% to about $131 million and topped expectations, which translated into earnings of $0.06 per share. The impressive performance reflects the steady growth of the customer base that includes 960 clients with annual recurring revenue of $100,000 or more.

For quarterly results and updates on Datadog, stay tuned here

The stock’s value more than doubled since the beginning of the year. It closed Tuesday’s session at $88.89, after retreating from last week’s peak. Interestingly, most of the growth was recorded in the past three months, following a soft period when the shares mostly languished near their IPO price.