DataDog (DDOG) – a popular cloud security software play – reported 2Q23 earnings this morning. As you can see from the chart above, after a one and a half year downtrend, DDOG had been on fire for the last three months – almost doubling in price. But that came to an end today when they lowered the midpoint of their full year guidance by $35 million, knocking $7 billion in market cap from the stock.
You read that right: DDOG lowered the midpoint of their full year guidance by only $35 million but that has resulted in 20x that being wiped off the stock’s market cap. That’s because when you buy high growth, very expensive stocks like DDOG, the stock price is extremely sensitive to any increase, or in this case slowdown, in growth. The theoretical rationale is that all the value is in future earnings and so slight changes in the growth rate make a big difference when you discount those earnings back to the present.