A recent analyst downgrade hammered price action, while unrealistic valuations, even for a high-flying AI-driven tech stock like Datadog with value destruction and a single-client dominant business model, spell trouble ahead. Is this company a sell-the-rally candidate?
Short Trade Idea
Enter your short position between 128.99 (approximately its 50.0% Fibonacci Retracement Fan level) and 145.94 (the mid-level of its horizontal resistance zone).
Market Index Analysis
- Datadog (DDOG) is a member of the NASDAQ 100 and the S&P 500.
- Both indices are near record highs, driven by AI-related companies. At the same time, bearish warning signs continue to accumulate.
- The Bull Bear Power Indicator of the NASDAQ 100 shows a negative divergence and does not confirm the second-quarter rally.
Market Sentiment Analysis
Equity markets brushed off Trump’s fresh tariff threat for the EU and Mexico, betting on the TACO (Trump Always Chickens Out) trade and a reduction in final tariffs by the August 1st deadline to reach a compromise. Today is the start of the Q2 earnings season, with banks expected to deliver another stellar quarter. Traders will also get June inflation data that will show the impact of recent tariffs and provide much-needed guidance. While futures are down, the picture could change as bank earnings roll in this week, but traders should expect volatility ahead.
Datadog Fundamental Analysis
Datadog provides monitoring of servers, databases, tools, and services through a SaaS-based data analytics platform. It has embarked on a series of smaller acquisitions to boost its services portfolio. It uses open and closed source technologies.
So, why am I bearish on DDOG after its recent correction?
OpenAI accounts for over 60% of its revenues, but the company began investing in in-house solutions, which could wipe out revenues for DDOG. It prompted the analyst downgrade, as DDOG cannot replace the lost revenue once it materializes. I caution against buying companies dependent on one client for the bulk of their revenues. It is time to head for the exit, especially at current valuations.
|
Metric |
Value |
Verdict |
|
PE Ratio |
295.32 |
Bearish |
|
PB Ratio |
16.43 |
Bearish |
|
PEG Ratio |
2.63 |
Bearish |
|
Current Ratio |
2.74 |
Bullish |
|
ROIC-WACC Ratio |
Negative |
Bearish |
Datadog Fundamental Analysis Snapshot
The price-to-earning (PE) ratio of 295.32 makes DDOG an unacceptably expensive stock. By comparison, the PE ratio for the NASDAQ 100 is 40.68.
The average analyst price target for DDOG is 139.28. While it suggests fairly valued levels, I expect more downside revisions ahead.
Datadog Technical Analysis
Today’s DDOG Signal
Datadog Price Chart
- The DDOG D1 chart shows price action closed a previous price gap higher.
- It also shows the formation of a massive horizontal resistance zone with multiple breakdowns likely.
- The Bull Bear Power Indicator is bullish, but on the verge of a bearish crossover.
- The average trading volumes during selloffs are higher than during rallies.
- DDOG corrected as the NASDAQ 100 recorded fresh highs, a significant bearish development.
My Call
I am taking a short position in DDOG between 128.99 and 145.94. I see much more downside ahead with the looming loss of OpenAI as a client. The current valuations show a disconnect from reality, and I will sell the rallies. I expect the next earnings release to include a downbeat outlook.
- DDOG Entry Level: Between 128.99 and 145.94
- DDOG Take Profit: Between 81.63 and 87.70
- DDOG Stop Loss: Between 151.65 and 156.20
- Risk/Reward Ratio: 2.09
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