With uncertainty representing one of the main motifs of 2025, a positive earnings report alone isn’t enough to guarantee upside for publicly traded enterprises. Observability service Datadog Inc DDOG — which focuses on cloud-scale applications — got the short end of the stick recently. Despite delivering strong results, investors appeared to have viability concerns due to shifting sector dynamics. As such, DDOG stock initially gapped higher to start the Thursday session, only to decline roughly 4% in the afternoon hours.
For the second quarter of fiscal 2025, Datadog posted earnings per share of 46 cents, representing a positive surprise of 12.2% over the analysts’ consensus view of 42 cents. In the year-ago quarter, earnings landed at 53 cents per share. On the top line, the company generated $826.76 million in sales, up 4.54% against the estimate calling for $819.47 million. One year ago, the tally was $645.28 million, thus representing over 28% growth.
Adding to the positive sentiment, management raised its fiscal 2025 revenue outlook to $3.312 billion to $3.322 billion. Previously, the guidance was set in a range between $3.215 billion and $3.235 billion. Even better, the latest forecast exceeded the consensus estimate of $3.236 billion.
Initially, the results sent DDOG stock dramatically higher, with Thursday’s opening price clocking in at $148, 8% above the midweek session’s close. However, DDOG quickly succumbed to volatility. Some of the red ink could be due to concerning details, such as an operating loss of $35.5 million. In contrast, the year-ago quarter saw operating income of $12.6 million.
Still, the bulk of concerns could be due to OpenAI. Last month, Guggenheim analysts downgraded DDOG stock to Sell from Neutral and cut its price target to $105. They anticipate that OpenAI will reduce its use of Datadog’s services in favor of cheaper, internally managed observability tools.
Admittedly, that wouldn’t be an encouraging development. At the same time, 28% growth in a maturing cloud-software sector is a huge positive. What’s more, given the lack of overt disclosures and caveats, this growth appears organic, with minimal dependence on non-recurring events or gimmicks.
Why DDOG Stock Empirically May Deserve the ‘GARP’ Label
Given the strong earnings results and that DDOG stock initially popped higher, you could arrive at the conclusion that the security is a “GARP” play: growth at a reasonable price. While I don’t mean to kill sacred cows, the harsh reality is that GARP is structurally a presuppositional fallacy. It smuggles the conclusion (that the stock is a compelling investment) into the premise (that an objective standard called “reasonable price” exists).
In my opinion, we need another way to assess the viability of DDOG stock. Commonly, people turn to technical analysis. On a weekly scale, DDOG’s candlestick chart appears to show a pattern similar to what technicians would call a “doji star.” Essentially, the philosophy behind this heuristic is that the bears have exhausted themselves, allowing the bulls to take over.
As you might imagine, I also find this statement to be a presuppositional fallacy because it smuggles the conclusion (that the bulls will eventually take the helm) into the premise (that visual patterns objectively indicate bearish exhaustion). So, what do we do?
Just about the only objective truth that exists in the equities sector is that, at the end of the day, the market is either a net buyer or net seller. That’s it. We’re not going to make assumptions about what the actors are thinking, what they had for breakfast — none of that.
In the past 10 weeks, we know that the market voted to buy DDOG stock six times and sell four times. Throughout this period, the security enjoyed an upward trajectory. For brevity, we can label this sequence as 6-4-U.
We now have a truly falsifiable pattern, as opposed to doji stars, inverted hammers and three black crows (yes, these are real technical signals, believe it or not). From here, we can use past analogs to determine how the market responded to the 6-4-U sequence. In addition, we can create a decision-tree logic by analyzing major demand profiles across rolling 10-week intervals (since September 2019):
| L10 Category | Sample Size | Up Probability | Baseline Probability | Median Return if Up |
| 3-7-D | 11 | 72.73% | 57.33% | 3.47% |
| 4-6-D | 32 | 56.25% | 57.33% | 3.58% |
| 5-5-D | 49 | 59.18% | 57.33% | 5.18% |
| 5-5-U | 29 | 51.72% | 57.33% | 2.14% |
| 6-4-D | 27 | 48.15% | 57.33% | 3.35% |
| 6-4-U | 54 | 66.67% | 57.33% | 4.84% |
| 7-3-U | 47 | 48.94% | 57.33% | 5.48% |
| 8-2-U | 22 | 54.55% | 57.33% | 5.33% |
From the table above, the baseline probability or the chance that a long position in DDOG stock will rise on any given week is 57.33%, a strong upward bias. This is effectively our null hypothesis, the performance expectation assuming no mispricing. Of course, our alternative hypothesis is that, because of the 6-4-U sequence, our odds of success stand higher at 66.67%. Assuming viability of the signal (more on that later), there’s an incentive to bet on DDOG.
Under the positive pathway, DDOG stock enjoys an expected median return of 4.84%. If the bulls can maintain control of the market for the next four weeks, it’s possible that DDOG can enjoy another 1.32% lift. If the security can close at $132.50 on Friday, the anticipated optimistic target is approximately $140.75.
Using a Quantitative Method to Formulate an Options Strategy
Based on the market intelligence above, the 135/140 bull call spread expiring Sep. 19 appears tempting. This transaction involves buying the $135 call and simultaneously selling the $140 call, for a net debit paid of $220 (the most that can be lost in the trade). Should DDOG stock rise through the short strike price ($140) at expiration, the maximum profit is $280, a payout of over 127%.
Given how much DDOG stock is moving, the above pricing is a rough reference. Your mileage may vary. That said, the structure of the call spread is enticing because there’s a legitimate case for DDOG to exceed the $140 level based on how the market has previously responded to the 6-4-U sequence in the past.
But just how statistically reliable is the sequence? Running a one-tailed binomial test reveals a p-value of 0.0823, which means that there’s an 8.23% chance that the implications of the signal could materialize randomly as opposed to intentionally.
Straight up, if we were running a biopharmaceutical company, our drug would fail clinical testing. However, we’re not attempting to cure rare diseases; rather, we’re seeking an asymmetric edge. I genuinely believe in context (i.e. recognizing the stock market’s open and entropic system) that the 6-4-U signal is empirically intriguing — especially in light of positive earnings results.
And if we’re going to be fair, you would have to ask the fundamental and technical folks what the p-values are for their GARP and doji star assessments. Let me know if you ever get an answer.
The opinions and views expressed in this content are those of the individual author and do not necessarily reflect the views of Benzinga. Benzinga is not responsible for the accuracy or reliability of any information provided herein. This content is for informational purposes only and should not be misconstrued as investment advice or a recommendation to buy or sell any security. Readers are asked not to rely on the opinions or information herein, and encouraged to do their own due diligence before making investing decisions.
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