Thesis
Datadog (NASDAQ:DDOG) is a leader in monitoring solutions for cloud applications. It plays in the competitive and large application performance monitoring (APM) space.
My conviction in the company is driving by a growing market, the team, and the product set. First, we can discuss the market. Digital transformation is a mega-trend that the business is riding, and covid has accelerated adoption of cloud-based tools like Datadog. Second, the company is founder-led and is executing at hyper-speed in terms of customer growth and product development. Third, the product set positions the company competitively in the landscape.
From these perspectives, I am positive on the long-term prospects of the stock and rate them a buy. In the short-term, we may see volatility related to valuation.
Source: Datadog
Market and Product
Datadog is leading the second wave in the cloud infrastructure monitoring market. Below, I will give some context to the market growth and changes, and why Datadog is positioned well.
Infrastructure monitoring and application performance monitoring (APM) has been around for a long time. Some of the features in this space include logging, network monitoring, and security.
Observability - the ability for engineers to watch sites in real time and understand issues facing their live sites - has become an increasing challenge as the Web has grown and applications have become more complex. Companies have created internal teams to capture, store, and visualize performance over time. They also have started to focus on understanding root causes to prevent issues from reappearing in code.
Performance data can mean a variety of things - from CPU data to service availability. The first generation of tools also incorporated log analysis. System logs and application logs are post-mortem reports on errors. Finally, software tools incorporated tracing. Tracing provides a view into how a request moves through an application. As the name suggests, tracing allows developers to understand where the problem begins by working backwards.
Companies like New Relic (NEWR), Splunk (SPLK), and many others led the charge in the first wave. One key indicator of success was time to resolution. With the emergence of real-time applications like Netflix (NFLX) and Twitter (TWTR), solving problems quickly became more important.
Source: Datadog
With the rise of real time applications, cloud-based hosting, microservices, and DevOps, observability became very important.
Source: Datadog
Datadog came in to offer monitoring and context to queries by developers. Their one solution covers all the key areas like tracing and metrics across all layers of the stack - from applications to servers. Datadog called their approach holistic and became a one-stop shop for the emerging needs that legacy players could not keep up with.
Source: Datadog
Gartner estimates this market, called the IT Operations Management (ITOM) market, at $23 billion. Datadog, now with the trust of a broad base of customers, is moving into security as a natural extension of monitoring. By being proactive instead of just reactive, Datadog can increase its market size and its offering set at the same time.
Source: Gartner
Built on modern technology, Datadog also has built a product moat that legacy players will find difficult to replicate. Datadog is expanding today across the three pillars of logging, APM, and infrastructure. 25% of customers are using all three today, providing runway for future growth, as per analyst calls and recent earnings.
Team
Datadog is led by founders Oliver Pomel and Alexis Lê-Quôc. I tend to favor founder-led builders, which this company squarely fits into. The team has an all star board of investors and advisors to guide them through various strategic decisions as well.
Source: Datadog
Valuation Metrics
Revenue growth has been exception for Datadog. It has consistently grown at 80%+ YoY and expectedly trades at a premium valuation of 20x+ EV/S. I would wait for macro-selloffs across technology for buying opportunities, but would not wait for the stock to get below 10x EV/S. That may not happen unless there are execution mistakes.
The growth in customers spending over $100K is significant and growing. I believe this is a story of cross-sell and upsell.
