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.