Cloud-native observability and security platform Datadog (NASDAQ:DDOG) hasn’t exactly been a paragon of stability this year, with DDOG stock shedding almost 29% since the January opener. Nevertheless, the equity needs to be on your watch list as a potential recovery could be in the cards.
Typical reasons to consider Datadog centers on the so-called massive total addressable market in cloud and observability. With the company ranking as the category leader in the observability market (which includes monitoring, logging and tracing), several analysts have pounded the table, noting the huge runway.
Operationally, Datadog runs gross margins in the 75% to 80% range, giving the company the profile of high scalability. Combined with its capital-light structure, management has the flexibility to spend on research and development while still pursuing profitability.
Finally, Datadog enjoys rapid innovation and product expansion, constantly r0olling out new features and modules. Meanwhile, the platform itself keeps getting stickier, implying that its clients are less likely to leave. Throw in some magic words regarding digital transformation and artificial-intelligence-based infrastructure and you can quickly see why analysts are largely enamored with the name.
Still, at the end of the day, the behavioral state of demand is all that matters. In other words, whatever convinced people to buy DDOG stock — the addressable market, the margins, customer retention or flippin’ UFOs landing in Roswell — represents the collective driving force undergirding the security.
Unlike continuous scalar signals like share price, behavioral states are discrete events and as such, they can be categorized, quantified and subsequently analyzed for probabilistic analysis.
If you ask investors whose minds they would pick if they could, the usual suspects such as Warren Buffett or Peter Lynch would likely materialize. However, if I could choose anyone from history, it would be Andrey Markov. The Russian mathematician, best known for his work on stochastic processes, delivered a system of applied probabilities that hold up well, even under the dynamic conditions of the modern equities market.
Of course, I don’t have time to fully flesh out the power behind Markovian principles. However, the core concept centers on the establishment of defined or discrete states of existence and their transition probabilities (or the likelihood of changing between those states).
What makes the market application of Markovian principles so effective is the simplicity: we’re not dealing with interest rates, currency fluctuations and dynamic oscillators. No, we’re just dealing with demand or no demand — that’s it.
Under this ultra-simplistic framework, we can see that in the past 10 weeks, DDOG stock printed a “3-7” sequence: three weeks of upside interspersed with seven weeks of downside, with a negative trajectory across the period.
This pattern? It has only materialized seven times in the trailing decade. What’s more, in five of the instances, DDOG stock popped higher in the following week.
What’s more, down-week-dominated streaks don’t last long for Datadog. The last time such a negative streak occurred was almost three years ago, when DDOG printed a 4-6 sequence. Over the next half-year period, the bulls gradually regained control of the market, sending shares higher.
That’s why I’m not terribly concerned about the volatility. DDOG stock has demonstrated resilience under pressure, and I don’t anticipate this trend to shift unfavorably anytime soon. Over the next two months, look for DDOG to challenge $109 to $110 as it looks to establish support at more elevated levels.
