I think that the low set is unrealistically low.
Hi Saul,
I think that the ‘low’ scenario would actually be terrible for Datadog.
Datadog has traditionally been a 15-19% sequential grower, a historical trend which management describes as the ‘lynchpin’ for its growth. If over the next 7 quarters Datadog becomes a 9-13% sequential grower, this implies significant deceleration due to the law of large numbers. By the end of it, Datadog has gone from an 83% grower to a 41% grower (forward looking).
If we continue to extrapolate out this deceleration due to law of large numbers at the same rate, in another 7 quarters Datadog will only be a 22% grower. Datadog will have gone from 83% growth to 22% growth in just over 3 years! This would suggest management are now misleading us or are just wrong about the opportunity ahead of it. At what point does this ‘large number’ effect stabilise, if at all.
I think sometimes we can overestimate the impact of ‘the law of large numbers’. We can also see in the example of Cloudfare how a company can maintain or even accelerate its sequential growth rate over a long period of time, with a predictable revenue model. If the ‘law’ mattered so much, perhaps Amazon would have entered negative growth over a decade ago (it just grew 37% YoY in its latest quarter).
Instead, I think the more important thing is whether a company can scale its sales organisation and infrastructure quick enough to meet its opportunity, keep product innovation and even find new ways to grow. For Datadog:
- It is rapidly ramping up its sales org in line with its pace of growth and the opportunity that management sees.
- It is rapidly cross-selling existing products, which is a key part of its growth to date and its sales strategy. “Approximately 20% of customers are using four or more products, which is up from only 7% a year ago (and up from 15% in Q2)”. Another way of looking at it, there are still 80% of customers who aren’t using four or more products, to go after!!
- It just reaccelerated its new customers by +67% sequential increase from Q2 to Q3 (600 to 1000)!! The same increase as from Q4 19 to Q1 20. This denotes a sales org that is effective and that can scale up rapidly.
- 75% of new logo are landed with 2 or more products. This is UP from Q419 of 65% and UP from only 25% in 2018. So not only are Datadog reaccelerating the pace of their new logo growth, they are also increasing the value of new customers that they bring in. Again, going forwards what is to stop new customers being onboarded with three or more, or four or more, products!! I would not be surprised to see management start reporting this in coming quarters (I have noticed a subtle trend of them increasing their KPI reporting about this product mix in recent quarters).
- It is finding new avenues for growth, such as with its cloud provider partnerships (Azure and GCP) and FedRAMP, which are expected to provide meaningful revenue contribution through 2021 and beyond.
- It is in the early innings of their growth, as management emphasises again and again. The decelerating growth rate in the low scenario might imply it were already coming up to a saturation point.
For me, these are not the signs of a slowing business, or one about to slow any time soon.
With the opportunity all ahead of it, I really don’t see how the ‘law of large numbers’ will negate this growth to the point of deceleration. It seems unlikely to me, let’s not forget that Datadog has been a very consistent and stable grower up until its Q2 usage impact. It is possible that the effects of the pandemic could continue slow it down in the short term, but as management said they expect this effect to be ‘transitory’. So I would also lean towards the high scenario because the trends look positive to me. But really, I don’t know either, so I am looking to Q4 for more clues to add to the story 