2024 has not gone well for Datadog (NASDAQ: DDOG) . The data-monitoring company offers value to the IT community, and it continues to attract more customers. Still, the stock has struggled to break out of a trading range in recent months, and has fallen by about 6% since the beginning of the year.

Such price action may leave investors wondering how to approach the software-as-a-service (SaaS) stock . Does this stagnation signal a buying opportunity in Datadog, or should investors expect more challenges to come?

The state of Datadog

Datadog stands out by offering cloud monitoring services to oversee large-scale applications and infrastructure. It tracks the metrics of servers, databases, containers, and applications, delivering actionable alerts to inform customers of emerging issues.

The cost of not identifying and addressing such issues early can be costly. Thus, it is not surprising that an increasing number of customers are turning to Datadog. Its total number of customers is now approaching 29,000, a 10% increase from a year ago.

Moreover, it continues to develop new products and has successfully persuaded most customers to make use of the new products. According to the company, 83% of its customers use at least two of its products, with 49% opting to buy four or more products.

Additionally, almost 3,400 of its customers spend at least $100,000 annually on Datadog's platform. That rose 13% over the last 12 months, a further indication of the increasing value it delivers to customers.

Datadog's financials

This approach helped it generate nearly $1.3 billion in revenue in the first six months of 2024, 27% more than in the same period in 2023. That matched the 27% growth rate in 2023, though it fell short of the 63% increase in 2022, when the pandemic brought more activity to the cloud.

The company has also slowed its operating expense growth enough to turn an operating profit of $25 million over both quarters of 2024. Even though interest income accounted for most of its profit, the company generated $86 million in net income in the first two quarters.

Interestingly, this stands in contrast to during the early days  of the pandemic, when its stock price was much higher despite the generally accepted accounting principles (GAAP) losses reported at that time.

Still, even though the market is not giving it as much credit for reporting positive net income, the fact that it now generates a profit makes it less likely to need outside funding. That should reassure investors who might otherwise have to worry about share dilution or rising borrowing costs.

Valuation challenges

Given such conditions, one might wonder why Datadog's stock continues to struggle. The most likely reason probably pertains to its valuation. As a newly profitable company, its trailing P/E ratio of 351 is meaningless. Still, with a forward P/E ratio of 68, most investors would probably consider Datadog expensive.

Unfortunately for Datadog bulls, the company's forecast may make investors less willing to pay such a premium. It forecasts revenue of $2.63 billion in 2024, implying a yearly growth rate of 24%. While that still amounts to considerable growth, it is down from last year's 27%. Since the current valuation arguably prices it for perfection, such a slowdown could take the stock price significantly lower.

Is Datadog stock a buy right now?

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

This is not so much because of Datadog's performance. Customer counts and product purchases continue to grow. While the rate of revenue growth may slow over the next few quarters, the company is now profitable, placing it in a position of strength.

Unfortunately, the high earnings multiple could mean the slowing revenue growth places more downward pressure on the stock. Even though Datadog is in a position to achieve long-term growth, investors should probably think twice about buying shares at the current valuation.

Before you buy stock in Datadog, consider this: