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Datadog: Stay Long Or Stay Out

Mar. 01, 2020 7:20 PM ETDatadog, Inc. (DDOG) StockPANW29 Comments
Kayode Omotosho profile picture
Kayode Omotosho


  • Datadog has the potential to become the largest player in the DevOps space.
  • Its strong growth momentum and margins trend suggests a growing owner's earnings in the near term.
  • At 25x FY'20 revenue, Datadog isn't cheap. Therefore, timing volatility will be tough.
  • Investors should keep a tab on the proliferation of open source DevOps tools.

Source: Author (using data from conference call)

The thesis for Datadog (NASDAQ:DDOG) to keep acquiring market in the growing DevOps market remains valid. While valuation has mostly priced in future growth, there isn't evidence of substantial near term weakness. Datadog will continue to dominate the APM and DevOps space due to its brilliant products and strong momentum, which is propelling its brand value in its niche. Datadog is a long term hold, and any attempt to predict near term price action will fall short due to the difficulty inherent in timing volatility.

Source: Author (using data from Conference Call)

The demand for Datadog's products remains strong. Management is guiding for strong revenue and ARR growth in 2020. The case to upsell new products is also strong as this will drive the dollar-based net expansion rate, which came in strong at over 130%. This will positively impact margins and free cash flow, which are nearly breakeven.

Given the strong third party reviews and ratings of its products, which has reflected in its growth numbers, the product retention rate will be the most significant source of near term weakness. Management put the gross retention rate above 90% in its S-1. The retention rate can be impacted by pricing and product value proposition. Given that the product value proposition is solid, the only near term concern I project is pricing. Datadog's business model is riding on the latest cloud service evolution, which has enabled platform providers to add more value to enterprises by charging for cloud deployment on a per-usage basis. The aim of this billing methodology, which largely explains the serverless computing trend, is the affordability and scalability it gives enterprises to consume cloud resources at an optimal rate. However, with the proliferation of cloud resources, enterprises will carry a lot of cloud service inventory. This makes it easy to underestimate the

This article was written by

Kayode Omotosho profile picture
Kayode's strategy aligns only with businesses that have competitive moats, solid financials, good management, and minimal exposure to macro headwinds.-------------------------------------Coverage tilted towards tech stocks (IoT, Cybersecurity, Cloud, DevOps, Data management)

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (29)

Michael W Byrne profile picture
Good writeup. One question I have is - are DDOG and PD competing for the same market share or are they in different parts of the dev ops space?
Kayode Omotosho profile picture
Thanks Michael, they are in different parts of the DevOps Space.
Michael W Byrne profile picture
Thanks for the reply Kayode. I had read your article (and those of a couple of other authors) on PD in the past and it seems like they are finally starting to pick up some momentum since their lows. I'm interested in both companies for the long term and was wondering if they could both be 'winners' in this space and it seems that they can...
Kayode Omotosho profile picture
Absolutely Michael. Valuation is always forward-looking.

I'm still digging deeper into Datadog. It has an Oracle-like DNA which might make it tough for enterprises to leave the platform.
In the Ruff Research profile picture
Some additional insights-

The institutional insiders have sold off their positions:

Index Ventures (which previously owned over 10%) in 4 transactions in late February and mid-March

Morgan Stanley Capital on April 30th and filed their schedule 13g today announcing their sale

As for the officer insiders, here is the approximate percent reduction in their shareholdings since February:

CFO - Sold off approximately 75%-80% of their shares

Chief Revenue Officer - Sold off appxroximately 95% of their shares

CEO - Sold off 100% of his Class A common although he has retained his class B (which he has restrictions)

The same is a similar story for the rest of the C-suite...

up until January 22nd, people were buying shares.....since then....the insiders (Officers, Directors and Institutions) have all sold the majority of what they own.

So ask yourself, what is it that you think you know that the people on the inside don't?
In the Ruff Research profile picture
Just another bubble...

Take a gander at the insider trading on the company.

For the past month (including till the end of last week)….the entire C-suite has been selling of the shares since it hit in the $30 range and up.....(Dozens and Dozens of transactions selling Hundreds of Thousands and Millions over the last Month and a half).

This includes the CEO, President CTO, Chief Product Officer, Chief Revenue Officer, CFO and Directors, and Insitutional Shareholders with greater than 10% ownership.

These aren't "schedule sales" as there are MULTIPLE (over 40 spread throughout the period from Feb 19th till May 8th) , of different sizes (hundreds of thousands for 50% to the other 50% representing Millions of Dollars per transaction) and different varying time periods.

There was not a single purchase by anyone this year....and they were only Buys previously.

This is a classic case of an overvalued company, and the people on the inside are hoping that there are enough suckers on the outside to help take them out at a nice valuation.

Their peer group is all trading at lower multiples...so you have to ask yourself why?
Kayode Omotosho profile picture

I share some of your sentiments. However, algos have been updated to buy any asset that plays into the work from home/cloud/digital transformation theme.

Traditional valuation yardsticks are useless at this point
In the Ruff Research profile picture
You are probably right....I feel sorry for the retail investor who thinks they can make a momentum play on a company like this....all ponsi schemes eventually fall (all they had to do was check the Schedule 13g/f and 4 filings...and they would see what's happening with the insiders basically exiting ownership of the company)
On May 11th when this comment was made, share price was $56.78. Today 19 June, it closed at $86.79. A 52.9% increase.
Kayode Omotosho profile picture
Subscription impact report COVID-19 Edition

Overall, the COVID-19 Subscription Impact Report found that 53.3% of companies have not seen a significant impact to their subscriber acquisition rates. 22.5% of companies are seeing their subscription growth rate accelerate, 12.8% of companies are seeing slowing growth, but are still growing, and the remaining 11.4% of companies are starting to see subscriber churn outpace their subscriber acquisition rates.

wait for lockup expiration and load up in high 30s
bil1026 profile picture
@Kayode Omotosho - How will cash flow change for next 6 months, 1 year, 2 years? Will they be forced by competition into heavy capex?
Kayode Omotosho profile picture
I expect the playbook of prioritizing innovation over resource optimization to impact cash flow growth.
When I read the article I thought it's a typo: P/E at 25x multiple not P/S. And yet, that's right, P/S = 25x. I don't see the upside at this valuation, even if DDOG would have FB kind of profit margins (which they won't), they'd have to grow three times at the same rate (i.e. 6 years) and turn on the profit switch (which they won't).

Question for bulls, where do you see valuation and revenues in 1, 3, 5 years.
why are you comparing a SaaS business valuation to FB valuation?

Because they are both software companies, and while we don't have a mature SaaS company to compare, FB is a good proxy. I'd be surprised if you thought SaaS would have better margins and multiples than the likes of GOOG, FB, or NFLX. I'd argue on the contrary, that all SaaS companies will have worse margins and multiples than any of those because they won't have the scale.

What kind of multiples and comparisons should SaaS have when they become mature companies?
CRM is a mature SaaS business that you can use to compare for what these companies will trade at when they mature.
Got a small position but will add when shares move lower !!
El Financeiro profile picture
Thanks. Good article. I’ve been keeping and eye out since IPO. Valuation is scary, but hoping for a real pullback In the 20s. As you point out, this is a hard one to time.
Kayode Omotosho profile picture
Thanks el. I also wished I got in early. I believe they are on to something big.
IFindKarma profile picture
Great company. 2-3 years of high-growth...not good growth...really GREAT growth, are already priced in. Good luck to those buying near the top. What is the final mkt cap for the DevOps space winner? How about $14-15b...that sound big enough? Guess what, DDOG already pretty much there. So I don't see the upside. If you are ok with a CAGR equivalent to the S&P over next 5-10 years, knock yourself out. But eventually their growth drops off from crazy to simply good, and stock will plummet and/or plateau for potentially years from that point. The real winners here are those who were in on the IPO.

For share price gains, better off buying ESTC.
jonnyvern profile picture
The lockup is coming, stock will drop. good prices to come.
20% of lockup shares have already been released in January. there was little selling.

The final MC of the winner in this space will be $100bil+ (probably 2-3x this) not $13-14bil.
When is exact lock up expiration date?. I see two dates mentioned, 3/09 and 3/17, not sure which one is correct. Does nay one know?.

Apparently there is huge lock up to the extent of 230 million shares which will very likely have significant on stock price short term.
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