As the global economy becomes more digitized by the day, business and customer data are kept in what’s now the most common term in the technology sector: The Cloud. Companies rely on cloud computing services and artificial intelligence to make the vast databases they can access work for them. While this is good for companies like Amazon.com Inc. (NASDAQ: AMZN) web services and the chip makers that enable computing power like NVIDIA Co. (NASDAQ: NVDA), there’s a better play out there.

Investors are recognizing a critical trend in cybersecurity: the speed of technology doesn't matter if safety measures are lacking. This is becoming a reality for many cloud-dependent companies. To bring this trend home, investors can look at Alphabet Inc. (NASDAQ: GOOGL) and its latest acquisition of cybersecurity startup Wiz for a price tag of $23 billion.

Why would one of the world’s largest technology companies be willing to pay this much for a startup that isn’t that established or deeply entrenched in its industry yet? Because cybersecurity is becoming the most essential thing today. By association, other cybersecurity stocks will be rallying or at least attracting Wall Street attention, with the latest being Datadog Inc. (NASDAQ: DDOG). Up to three Wall Street analysts covered the stock in July as a Buy.

Understanding Wall Street's Perspective on Datadog Stock

Starting with price action, Datadog stock looks like the leader among its peer group in cybersecurity. The stock now trades at 88% of its 52-week high, compared to Zscaler Inc. (NASDAQ: ZS), which trades at a lower level of 76% of its 52-week high.

Another worthy mention to peg Datadog against is Fortinet Inc. (NASDAQ: FTNT), where momentum has yet to favor that stock as it trades at only 73% of its 52-week high. Analysts on Wall Street rarely stick their necks out to back a stock that is not seeing favorable price action, so Datadog’s recent moves gave some on Wall Street a confidence boost.

With a consensus forecast for up to 25% earnings per share (EPS) growth, Datadog stock also beats its peers. Zscaler expects to see just under 10% EPS growth for the next 12 months, while Fortinet analysts landed on a forecast for 9.5% as well for this year. Leaning on another bullish factor, here’s what valuations look like today.

Those at Loop Capital saw it fit to place a price target on Datadog of up to $160 a share as recently as July 2024, daring the stock to rally 30.3% from where it trades today. While not as bullish as Loop Capital, other analysts still see a double-digit upside for Datadog in the quarters ahead.

Evercore analysts justify a price target of $150 for Datadog stock, implying a net upside of 22.1% from today’s prices. Mizuho is in the middle of Loop Capital’s high range and Evercore’s low range. Analysts at Mizuho see a $155 valuation for Datadog stock, calling for a rally to the tune of 26.2% higher.

Datadog's Financial Momentum: Evaluating the Numbers for Investors

Looking into the company's financials can be a good way for investors to justify the currently bullish views on Datadog stock held by Wall Street analysts. Most importantly, digging into the first quarter 2024 earnings results can uncover recent financial momentum.

Starting with the top line (revenue), investors can see the press release led by 27% annual growth, bringing Datadog's net revenue to $611 million. However, not all revenue is equal, as subscription revenue is the better part of cybersecurity businesses since it is more predictable and stable than one-off sales.

Regarding subscription revenue, the customer count grew to 3,340 annual recurring revenue members, paying over $100,000 a year for Datadog's services. Trickling down from this user and revenue growth are Datadog's net income figures, which went from a net loss per share of $0.08 to a net gain per share of $0.12 for the quarter.

On a more tangible basis, in accounting terms, investors should examine Datadog's free cash flow (operating cash flow minus capital expenditures). Operating cash flow grew from $133.7 million last year to $212.3 million this quarter, and adjusted for this quarter's $14.1 million in capital expenditures, Datadog has $198.2 million in free cash flow.

Achieving and maintaining positive free cash flow is what every investor should look for in an investment. Why? Businesses can use this capital to reinvest into business growth, the foundation for investors to compound their wealth on an investment.

Datadog's growth in recurring revenue carries a gross margin of 81.4%, so investors can reasonably expect the company to continue generating positive free cash flow and improving its value offer to attract more customers. Knowing this, Wall Street analysts made the potentially right call.