Datadog - one thing to note

Hello,

The objective of this post is to point out that Datadog’s YoY growth would likely decelerate starting from Q2 (Jun Quarter) but this would be a technical deceleration due to the cadence of growth in the prior year (2021). This should not be a reason to sell the stock (unless we see a deterioration in its fundamentals).

This is the data for 2020, 2021 and my estimates for 2022:


           Q1/20   Q2/20   Q3/20   Q4/20           Q1/21   Q2/21   Q3/21   Q4/21              

Revenue    131     140     155     178             199      234     270     326               
yoy(%)     87%     68%     61%     56%             51%      67%     75%     84%               

Q1/22   Q2/22   Q3/22   Q4/22 
368      424     475     546
86%      81%     75%     67%

Datadog’s business was impacted adversely by Covid for much of 2020 and in the first half of 2021: its YoY growth rate dropped precipitously starting from Q1/20 (87%) before bottoming in Q1/21 (51%).

From Q2/2021 onwards, there was a catch up in spend with the YoY going up steeply from 51% in Q1/21 to 84% in Q4/21 (aided by the easy comparables in 2020 and also the launch of new modules like APM).

Now, this same dynamic will create difficult YoY comparables for Datadog starting from Q2/22 extending to Q4/2022: as Q2/22 will be comped against Q2/21 (with a easy yoy of 67%) but progressively getting harder as it hits Q3/22 (comped against Q3/21 with a yoy of 75%) and then also for Q4/22 (comped against Q4/21 with a yoy of 84%).

Importantly, the above deceleration in each quarter is purely “technical” and if you stretch out to an annual basis, I believe that DDOG’s YoY in 2022 will accelerate vs. 2021. Using the same numbers as above, but looking at it from an annual basis, I believe DDOG’s YoY for full year 2022 will accelerate (76%) against 2021 (70%).


              2019      2020       2021       2022E
Revenue       363       603        1,029      1,813
YoY           83%       66%        70%        76%

To conclude, I believe that the technical YoY deceleration which we may see from Q2 2022 onwards should not be reason to sell the stock (unless we see a deterioration in other areas).

As always, the usual caveat of doing your own work and making your own decisions apply.

Cats

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The reason I am writing the above is because there’s a SMBC Nikko (minor brokerage house) analyst initiating on Datadog last night with a “Neutral” rating as “its sales growth is likely to decelerate meaningfully starting in Q2 amid more difficult comparisons”. I am waiting to see if there is any bot-like selling just because of that.

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We will have to see what Q1 and then Q2 guidance looks like. By the time Q2 earnings release hits, we’re going to have Q3 guidance. At this point we’re going to have a better picture of what sequential growth looks like in Q1, and Q2. This will indicate as to whether DDOG is materially slowing down, or if it’s just tough comps. Right now DDOG’s sequential growth is impressive and that’s what I’ve been going off of to indicate true revenue growth. We can do this each quarter and not get blindsided by a material slowdown when they release Q3 guidance on their Q2 earnings release. We have to remember DDOG is a much bigger company now than before COVID and may be battling laws of large numbers. This is not a given since the TAM DDOG is in is supposed to be very, very large.

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@cats

thanks for sharing your thoughts on this.

I too would like to understand how you derived your 2022 quarterly rev estimates.

Additionally, re: your POV that DDOG had a COVID slowdown in 2020 followed by a pull-forward in 2021…I think about DDOG and cloud migration a bit differently.

When companies migrate to the cloud, they initially think that they can handle it using out of the box services from their cloud provider or what they already use. This usually proves to not be enough, especially as their cloud usage and footprint grows. Thats when they realize that they need a DDOG-like suite of products and services.

As there was a cloud adoption surge in 2020, DDOG started seeing more business in their pipeline a few quarters later. This is evidenced in the 2020 & 2021 YOY % comps.

However I think that this ramp up is more sustainable and not just a 1-year phenomenon because cloud migration has not slowed down. In fact, it is accelerating. Look at any CIO survey to find out where they are spending their 2022 budget $s…their top priorities are cybersecurity and cloud.

DDOG’s seq QOQ comps in both revenue AND deferred revenue show a steady and healthy increase over 4-6 quarters. This tells me that the ramp up is not going to dissipate - revenues being the lagging indicator and deferred revenues being the leading indicator.

Thanks again.

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