DataDog and Alteryx - relative valuation

Investment Analysis Clubs Saul’s Investing Discussions
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I’m long both DataDog and Alteryx. DataDog’s valuation is extreme. That doesn’t mean it’s not a good investment. The opportunity and results are also amazing. I’m long DataDog because I think that this company will dominate a huge market, and a few years from now the current price will seem very cheap.

However, I only have purchased a starter position in DataDog. I am a bit wary of DataDog’s high p/s ratio. I do think Saul’s reasoning is sound as to “this time being different”, but I also feel a bit of trepidation. I’m not particularly business savvy (I am a humble middle school teacher after all), and the current price does trigger a certain heuristic within me concerning overvaluation. That’s a big contributing factor to my reticence towards building a large position right away. I want to scale into the name.

But the bigger reason I am not building my DataDog position too fast is because at current prices it is hard for me to justify putting money into DataDog when I could buy Alteryx instead. My Alteryx position has been growing and has ballooned to 33% of my portfolio. I know that’s a huge allocation, but keep in mind that I am young and accumulating, and the position is not much bigger than what I would plan to add in contributions to my account next year. I think DataDog could be a home run purchase right now, but Alteryx may be a grand slam.

Here’s the way I see things.

Alteryx revenue September 2019: 103,397
Alteryx revenue September 2018: 62,589
y/y growth: 65.2%
Alteryx Sept 2019 gross profit: 93,752
Gross Margin: 90.7

DataDog revenue September 2019: 95,864
DataDog revenue September 2018: 51,074
y/y growth: 87.7
DataDog Sept 2019 gross profit: 72,567
Gross Margin: 75.7

DataDog has greater growth; Alteryx has greater margin. End result, for every dollar earned in the year ago quarter, Alteryx generated $1.50 in gross profit(1.652*.907) in the current quarter. In comparison, DataDog generated $1.42 in gross profit (1.877*.757) for every dollar earned over the same time period.

Therefore, that when gross profit and revenue growth are considered together, Alteryx is growing its business faster than DataDog. And yet, Alteryx sports a p/s ratio of 16.52 and DataDog sports a p/s ratio of 39.39 (source: finviz).

This begs the question, should I be paying 2.38x more for DataDog than for Alteryx? What factors could make this valuation reasonable? I can think of a few things such as competitive position, size of market opportunity, strength of leadership, corporate governance, business model, and path to profitability. These all may contribute to one stock being more highly valued than the other. But for these two companies, I believe it is at least debatable as to who is stronger in each of these areas. I’m not about to consider any of that in my purchasing decision. I’ve read enough about these considerations for the two companies, but I don’t feel like I can confidently compare them in these areas as to which has the edge. They both seem pretty awesome, and more similar than different.

Am I missing something? The only thing I can think of is that I am not factoring in Alteryx’s transition to ASC 606 from ASC 605 accounting standards. If that’s the case, I would appreciate if someone could illuminate how to consider that.

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Am I missing something? The only thing I can think of is that I am not factoring in Alteryx’s transition to ASC 606 from ASC 605 accounting standards. If that’s the case, I would appreciate if someone could illuminate how to consider that.

Ayx is factoring it in for you. Every quarter they report since Q418 they have re-done the quarter they are comparing to. That is why if you go back to Q318 you will see the Revenues at that time were different then they are in Q319. I hope that is clear. I queried the IR for AYX just to make sure this was correct and here is what they said:

Hello,
I am a small investor that has been following your company for a while now and have a question.

In your Q3 2018 investor report you stated that Revenues were $54.2 million. Now in the Q319 investor report you are stating that Q318 revenues were $62.6 million. Could you explain how the difference is $8.4 million?

Thank you,
Andy

Their response:

Hi Andy,

As discussed in our Form 10K for the year ended December 31, 2018 (copy attached) we adopted ASC 606 a new accounting standard (as required) effective January 1, 2018. This new accounting standard changed the way we recognize revenue (additional details below). Since we adopted it on a modified retrospective basis, we presented 2018 results under both the old and new standards so the difference that you note below is related to the change in revenue recognition methodology.

Hope that helps but please let me know if you have any additional questions.

3. Revenue
We adopted the new revenue recognition accounting standard, ASC 606, effective January 1, 2018 on a modified retrospective basis and applied the new standard only to contracts that were not completed contracts prior to January 1, 2018. See Note 2, Significant Accounting Policies, of these notes to our consolidated financial statements for a description of our ASC 606 revenue recognition accounting policy. Financial results for reporting periods during 2018 are presented in accordance with the new revenue recognition standard, including retroactive restatement of quarterly information included in Note 18, Selected Quarterly Financial Data (Unaudited). Historical financial results for reporting periods prior to 2018 have not been retroactively restated and are presented in conformity with amounts previously reported under ASC 605. This note includes additional information regarding the impacts from the adoption of the new revenue recognition standard on our financial results for the year ended December 31, 2018 and also includes the presentation of financial results for the year ended December 31, 2018 under ASC 605 for comparison to the prior year. There were no changes to the ASC 605 policy used in the comparison disclosure during the year ended December 31, 2018.

Andy

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Thanks Andy! I really appreciate the response. :slight_smile:

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This begs the question, should I be paying 2.38x more for DataDog than for Alteryx? What factors could make this valuation reasonable? I can think of a few things such as competitive position, size of market opportunity, strength of leadership, corporate governance, business model, and path to profitability. These all may contribute to one stock being more highly valued than the other. But for these two companies, I believe it is at least debatable as to who is stronger in each of these areas. I’m not about to consider any of that in my purchasing decision. I’ve read enough about these considerations for the two companies, but I don’t feel like I can confidently compare them in these areas as to which has the edge. They both seem pretty awesome, and more similar than different.

No one here should tell you what decisions to make for your own portfolio, but I do think your analysis is correct. As Saul has said, I think the lower calculated billings for Alteryx this past quarter may have spooked some people, but I think that is bound to fluctuate. I don’t see that as even a yellow flag, but with Datadog there were very clearly no negatives. And the growth was faster. But yes, Alteryx currently looks more attractive to me as well, between the two. Saul and I and probably many others here also have Alteryx as our #1 position, so you won’t get any argument there. And for what it’s worth, I see no problem with being more concentrated as you’re still very early on in contributing new money to your portfolio.

I think one important reminder from this good post of yours is that there is always some uncertainty with every company that we love here – no matter how much they seem to be crushing their category. That’s why I never have a one stock portfolio. I’m not really talking about diversification, but simply a healthy attitude toward unknowns. The factors you list which I’ve bolded above are not perfectly quantifiable, may be technically unknowable, and can change (at least from our perspective) in a heartbeat, like we saw recently with Zscaler. There will always be unknown unknowns, and that’s a great reason to never get too in love with any company.

Thanks,
Bear

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“Am I missing something?”

Maybe time horizon?

Disclosure: AYX is my top SAAS holding while i have no position is DDOG due to valuation concerns but would like to get in.

For me, it is simply not enough to look at the rate of growth over a year or two, it is necessary to consider the longer term rapid growth potential. Many here and the brilliant analyst Bert (who has a valuation bent) believe that DDOG has the potential to become a giant company while AYX potential, while substantial, is more limited.

Some DDOG bulls see 50% revenue growth beyond 5 years, which means revenue could exceed $10-12 billion in 7 or 8 years. AYX will never become that size.

If i had high confidence that was a correct view, i would be in DDOG already. Others have that confidence. I’m still watching.

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Thanks to Bear for his reminder about not falling in love with a company. You are right that one can always be wrong. I guess that’s why I’m not all-in right now with Alteryx and only have it as 33% of my portfolio. I consider it to be one of my three core stocks. The others being The Trade Desk and MercadoLibre. I think The Trade Desk is a good long term bet because it has so many avenues for growth in big markets. And MercadoLibre’s growth at its current revenue run rate is simply astounding. My position in MercadoLibre is about half the size of my position in The Trade Desk, and the rest of my portfolio is split between some other names that I either would not consider as core positions or I might, if they had a more attractive valuation. These are names I plan on opportunistically scaling into over the course of the next year or so.

My current holdings are:

AYX 34%
TTD: 31%
MELI: 16%
ROKU: 4%
MDB: 4%
ZM: 4%
ETSY: 4%
DDOG: 4%

Replying to addedupon, I think you are right that the valuation for DDOG is higher because the consensus is that DDOG has a longer time horizon. I also think Alteryx may be underestimated by the consensus. I have heard management express that they eventually envision 10 billion dollars in annual revenue. However, this would happen upon several evolutions of the current offerings and building Alteryx into a dominant data platform. I think management are straight shooters. Everything I’ve heard from them and seen in how they do business gives me a lot of confidence in both their vision, and their execution. I especially want to thank TMFDatabaseBob for his reporting from the shareholder meeting. The report provided a lot of insight into the company culture. In terms of their opportunity I am thrilled about their acquisition of a ML company and their partnership for smart city development in Arizona. When The Motley Fool originally pitched Nvidia, they talked about artificial intelligence eventually being ubiquitous and the way they portrayed that in their pitch was through the lens of a smart city. Alteryx being a driving platform for that vision encourages me to think that the scope of the company will grow to something that is well beyond their current offerings. It think it is entirely possible that they will end up bigger than DataDog.

I think it is true that DataDog has more certainty around its future growth as the 50% revenue growth projection over many years is based on its current product offerings. They have created something amazing and investors do not have to anticipate the development of something beyond what currently exists.

Still, if DataDog does manage 10-12 billion in revenue in 8 years, and at that point in time its valuation is equal to that of Alteryx, that means Alteryx would only need to have revenue of 4.2-5.0 billion to have achieved the same CAGR. This would represent around 35% growth over that period, which is optimistic, surely, but also a lot easier to achieve than 50% growth over that time frame.

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Question for you and for most everyone on this board… when you say, for example, AYX is 33% of your portfolio, are you referring to it as a percentage of your entire investments including 401(k) for example? Or is it just 33% of your individual brokerage account?

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THIS IS OFF-TOPIC so if you want to respond, please do so off board. Everyone has a different answer anyway. I’m asking this as we don’t want a string of responses filling up the board with everybody’s responses.
Thanks,
Saul

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I wasn’t referring to the topic of the thread being OT, but to this question: when you say, for example, AYX is 33% of your portfolio, are you referring to it as a percentage of your entire investments including 401(k) for example? Or is it just 33% of your individual brokerage account?

Saul

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