2024 was not a good year for Datadog (DDOG -1.16%). The data monitoring company is providing value to the IT community and continues to add more customers. Still, the stock has struggled to break out of a trading range in recent months and is down about 6% year-to-date.

Such price action may leave investors wondering how to approach the software-as-a-service (SaaS) stock. Is this stagnation a sign of a buying opportunity in Datadog or should investors expect further challenges?

The status of Datadog

Datadog excels in cloud monitoring services for monitoring large applications and infrastructure. It tracks the metrics of servers, databases, containers, and applications and provides actionable alerts to inform customers of emerging issues.

Such issues can be costly if not identified and resolved early, so it’s no surprise that more and more customers are turning to Datadog. The total number of customers now stands at almost 29,000, a 10% increase from last year.

In addition, the company continues to develop new products and has been successful in convincing most customers to use these new products. According to the company, 83% of its customers use at least two of its products, and 49% choose to purchase four or more products.

In addition, nearly 3,400 of its customers spend at least $100,000 per year on Datadog’s platform, up 13 percent over the past 12 months, another indication of the increasing value the company offers its customers.

Datadog’s financial data

This approach helped the company generate nearly $1.3 billion in revenue in the first six months of 2024, up 27% from the same period in 2023. This matched the 27% growth rate in 2023, but fell short of the 63% increase in 2022, when the pandemic drove more activity in the cloud.

The company also curbed the growth of its operating expenses to the point where it was able to generate an operating profit of $25 million in both quarters of 2024. Although most of the profit came from interest income, the company generated a net profit of $86 million in the first two quarters.

Interestingly, this contrasts with the early days of the pandemic, when the company’s stock price was much higher despite the losses reported at the time under generally accepted accounting principles (GAAP).

While the market may not give the company as much credit for its positive net income, the fact that it is now generating a profit makes it less likely that it will need external financing. This should reassure investors who might otherwise be worried about share dilution or rising borrowing costs.

Assessment challenges

Given these conditions, one might wonder why Datadog stock continues to struggle. The most likely reason probably has to do with valuation. For a recently profitable company, its P/E of 351 is meaningless. Still, at a P/E of 68, most investors would likely consider Datadog expensive.

Unfortunately for Datadog bulls, the company’s forecast could make investors less willing to pay such a premium. The company is forecasting revenue of $2.63 billion in 2024, representing a 24% annual growth rate. While that’s still significant growth, it’s down from last year’s 27%. Since the current valuation arguably assumes perfection, such a slowdown could drag the stock price down significantly.

Is Datadog stock a buy right now?

Under current conditions, I would not recommend buying Datadog shares now.

This is not so much due to Datadog’s performance. Customer numbers and product purchases continue to grow. While revenue growth may slow in the next few quarters, the company is now profitable, putting it in a position of strength.

Unfortunately, the high earnings multiple could mean that slowing revenue growth is adding downward pressure on the stock. Even if Datadog is capable of long-term growth, investors should probably think twice about buying shares at the current price.