A week ago, in my end of September report, I wrote that I had taken a 1.0% position in Datadog. During the last week I built it up, when I could get it at what seemed to me to be more bargain prices, and it is now a 7.1% position !!! It’s not usual for me to build up a new position so quickly to almost a mid-size position, but that’s what I did.
I was influenced mostly by Bert Hochfeld’s write-up in September, pre-IPO. I have to say that I can’t remember ever reading an article by Bert that was quite as enthusiastic about the company being discussed (maybe Alteryx before I bought it), even if he concluded that Datadog stock would probably be too expensive for him when it came out. It did hit a high of $40.70 just after the IPO. My broker has my average purchase price at $31.92. The lowest DDOG price was $30.01 during the meltdown. Friday’s close was $34.72.
A few quotes from Bert’s article (Bert usually doesn’t write like this. He generally is a conservative guy. Bolding is mine.):
It is likely that these shares will become a foundation of high-growth tech portfolios.
DataDog has unique qualities. It has an exceptionally efficient sales model which has led to financial results that are far superior to that of most tech IPO’s at this time.
Longer-term investors who want to invest in IT will find this a compelling investment with excellent growth and a strong competitive moat.
It has not only developed appealing software, but it has been exceptionally proficient in building and selling new products.
Datadog has been offering the right set of products at the right time with an efficient sales motion.
Regardless of my attitude about TAM, I think it is fair to say that the opportunity for DDOG is one of the largest that exists for an emerging enterprise software company.
Remarkably, it has spent just $21 million in capital to reach an implied ARR of $333 million. The financial efficiency of that metric is multiples better than average for most new software companies.
It is self-evident that DDOG, while it will achieve a high valuation, will do so because it has long-term sustainable growth and a very efficient business model.
Is that the Bert that I know? The conservative, cautious, careful, Bert???
There was also an article by Alex Clayton that was linked to by someone on our board (sorry, but I can’t remember who). I was not familiar with Alex Clayton, but it seemed a good and thorough article. He was equally euphoric about the company, saying a lot of the same things.
Let me tell you a bit about Datadog: It is a SaaS software company that leases subscriptions to software that monitor infrastructure, analyze application performance and provide log management (I don’t even know what log management means). Recently it has added new products that provide for what it calls experience monitoring (what the experience of your customers are, as close as I can figure it), and a network performance management product.
What makes it unique is that its competitors have single products that work in silos while Datadog intergrates them all and its “three pillars of observability can be observed on a single pane of glass.” That’s hard to beat. As Bert says, “DataDog basically set out to create a platform that has broad appeal to developers and operations managers. To accomplish that, it built a product that is self-serve in nature and supposedly can be installed in minutes. And having a platform that offers all the monitoring and analysis of logs in a single platform is more unique than you imagine.” And that ability users have to look at their entire IT operation holistically and on a single pane of glass is a great differentiator.
The IPO said that 60% of their new customers are landing with more than a single product, up from 15% just a year ago, and 40% of all customers use more than one product, up from 40% a year ago. That implies that: A – their new products are incredilby good, and B - they are very efficient in selling them.
They have a calendar fiscal year and in 2018 they grew revenue at 97% and they will probably come in at about 80% this year in spite of being distracted by the IPO. That’s a little behind Crowd and Zoom, the two superstocks, but not by much. They’ve had positive operating cash flow both of the last two years, at least, and their adjusted net loss was only about 5% of revenue.
This is a very incomplete summary and if you are interested I encourage you to look into it further on their website, and certainly read Bert’s article, as well as Alex Clayton’s. In fact, I found Alex Clayton’s long article and here is a little quote from his article, just to give you a taste.
Datadog was founded “on the premise that the old model of siloed developers and IT operations engineers is broken, and that legacy tools used for monitoring static on-premise architectures do not work in modern cloud or hybrid environments”. Their platform enables developers, operations and business teams to collaborate, build and improve software applications and understand business and user performance. Moreover, their product is self-serve in nature and can be easily installed in minutes. Datadog was also the first company to combine monitoring across infrastructure and applications as well as offering logging in one solution. In addition, this year they announced products including network performance monitoring and real user monitoring. It’s important to note that each of Datadog’s products is fully capable on a stand-alone-basis and customers can choose to deploy one or more of the products at once. When deployed together, the sum is greater than the parts as it offers customers a single pane of glass view across their entire technology stack.
https://medium.com/@alexfclayton/datadog-ipo-s-1-breakdown-5…
Okay, obviously I don’t understand the technology, but I understand a company that is pleasing its customers, is growing very rapidly, has easy to install, easy to sell, and well integrated products (with new ones being introduced), has almost all its revenue on subscription and recurring, has a net retention rate of 146% (which is about as high as it gets), is not burning cash, etc. What more could I ask for? Granted, it’s not cheap (why would you expect it to be cheap?)… I’ll take it.
Best,
Saul
A link to the Knowledgebase for this board is in the Announcements panel that is on the right side of every page on this board.
For some additions to the Knowledgebase, bringing it up to date, I’d advise reading several other posts linked to on the panel, especially “How I Pick a Company to Invest In,” and “Why My Investing Criteria Have Changed,” and “Why It Really is Different.”