DDOG and MNDY Assessing Performance vs Guidance

[stockcub]

First of all, thank you Saul for starting this community. I joined this forum in Nov 2021,and have learnt a lot over the last 4 months. Based on my reading, I presume that this adheres to board rules, but feel free to delete if it violates.

As I read through the knowledge database, I understand the importance of sustainability of revenue (SAAS model), the revenue growth (YoY/QoQ), high gross margins(70% and above), improving FCF and FCF margins, DBNRR. However, I am trying to understand the evaluation of the business performance for the upcoming quarter vs conservative Guidance that companies provide. Hope this thread drives some good insights.

DDOG: Revenue growth rates for QoQ and YoY are as below including Q4 Guidance.
YoYGrowth QoQGrowth
2021Q1 51% 11.8%
2021Q2 67% 17.6%
2021Q3 75% 15.8%
2021Q4 64% 7.7%

Clearly, management is conservative on Q4 Guidance given that DBNRR is more than 130% and YoY growth has been accelerating for the last 3 quarters. Shouldn’t the expectation be at least Q4 revenue of $310M (75% growth YoY and 15% QoQ vs $292M guidance provided. Anything below $300M, isn’t it a red flag as that means not adding significant incremental customers as NRR is above 130%?

MNDY: Revenue growth rates for QoQ and YoY are as below including Q4 Guidance.
YoYGrowth QoQGrowth
2021Q1 85% 16.8%
2021Q2 94% 19.7%
2021Q3 95% 17.5%
2021Q4 74% 5.7%
Again similar to DDOG, this guidance is too conservative. Given their enterprise customers are up by 231% YoY and NRR is above 130%, shouldn’t the Q4 revenue be at least $98M at 17% sequential growth to Q3.

I know most of this board has these 2 as largest positions and do expect these to continue to accelerate revenue. But, would like to hear how you evaluate guidance or is for most part ignored, and evaluate the performance after Q4 earnings with focus on YoY growth?

Secondly, I know some of the leaders set internal targets before earnings announcement, Based on historicals, I am thinking along the lines of …

DDOG - “company guided Q4 Revenue of $292M on high end; But, I expect it to report at least $310M to keep the position with customer count above 100K at 1970 or above; For next Year, I expect revenue to be $1.62B at 60% growth rate; For Q4, company guided non-GAAP OI at $40MM at high end; I expect it to be $44M at least same as last qtr”

MNDY - “Company guided Q4 Revenue of $88M on high end; But, I expect it to report at least $95M to keep the position with customer count above 50K at 740 or above. For next Year, I expect revenue to be $584M at 90% growth rate and 2022 Q1 Guidance to be $110M or higher”

I am trying to learn to be good at exiting the position when business performance does not meet the bar. I would like to hear whether there are any flaws in the way I am thinking as mentioned above.

[SaulR80683]

Stockclub,
Guidance and estimates are just a game. The following is direct from the Knowledgebase, which you should read!
Saul

On the Estimates Game. I exaggerate a little for the clarity of the message, but what I am saying is essentially all true. I hope you find these ideas useful:

The earnings and revenues estimate game that the analysts play has put the company CFO’s, who give the outlooks, in a no-win situation. Here’s how it has come to work over time: It doesn’t seem to make any difference how good or bad the actual results are, whether they are up 3%, or 30%, or 70%, or more. The only thing that the headlines pick up is whether the earnings beat or missed analysts’ estimates. (Who cares???)

For example, a company whose earnings are up just 3%, but beats estimates by a nickel, will get screaming headlines. The headlines won’t say “ABC earnings only up 3%!” No, the headlines will say “ABC beats estimates!” The price will undoubtedly rise.

On the other hand, a company whose earnings are up 70%, but misses estimates by three cents, will get equally screaming headlines, not saying “DEF earnings up an amazing 70%”, but saying “DEF misses estimates!!!” The price will undoubtedly fall.

The whole estimates game is only about whether the earnings and revenue beat or miss a number that some analysts have picked. It totally ignores the question of how well the company is actually doing, and how good (or bad) the revenues and earnings really are.

However, the companies aren’t stupid. They have figured this out. And they have started to give lower and lower estimates for their next quarter, picking numbers that they are almost certain to beat (by a lot). They don’t want the bad publicity of missing analyst estimates. (Again, who cares!!!)

So what happens? The companies give low estimates and the analysts say “Good earnings, but disappointing estimates for the next quarter. We’re downgrading them from a buy to a hold.”

Thus the companies are screwed whatever they do. If they estimate high, where they think they will be, and miss, they get the “missed estimates” headlines, and if they estimate low, to let themselves beat estimates handily, they get the “disappointing estimates” headline. They lose either way.

How do we as investors deal with this puzzle? Think “How is this company doing? How much are earnings and revenues actually up?” What matters to me is that the company is growing revenue at 50%, and if the company sells off because of a “revenue miss” (which is a ridiculous term for a company increasing revenue by 50% if you think about it), I might take advantage of it by adding to my position.

I base my purchase decisions on how well the company is doing, and my evaluation of how it will do in the future, and how well its price matches its prospects, rather than whether the company came in two cents above, or two cents below, what the analysts predicted.

Evaluating company results against consensus analyst estimates can produce perverse and peculiar results. Consider this hypothetical: A small stock with three analysts following it has an average estimate of 50 cents for the quarter. Another “analyst” representing a firm that is secretly short the stock, puts in an estimate of 82 cents. This raises the “average estimate” to 58 cents. By raising the estimate he sets the company up to “miss” estimates. After all, it doesn’t matter what the actual results are, just whether they met expectations. Right???

Sure enough, if the company makes 53 cents, what would have been a nice beat becomes a 5 cent miss. The stock sells off for a few days, until people figure out that 53 cents was a very good result, and meanwhile, the firm closes out its short at a profit. Pretty ridiculous, isn’t it. But this hypothetical scenario could, and probably does, play out in the current market.

[stockcub]

Thanks Saul. I will ignore guidance and analyst estimates and focus on YoY revenue growth and sequential growth.

I base my purchase decisions on how well the company is doing, and my evaluation of how it will do in the future

For most of the SAAS companies selected, given a high DBNER of 130% or higher, companies could grow revenue without even adding substantial new customers. I am trying to see if I should put short-leash on a stock if it shows sequential revenue deceleration or still keep it given the high YoY growth and other alternatives.

I hope MNDY does better than $100M in revenue next quarter. But, for discussion, let’s assume MNDY reports Q4 revenue of $96M, a YoY growth of 90%. But sequentially growth will be 15.6% vs 17.6% reported earlier quarter.

Qtr                       Revenue             Seq%
2Q20                      $36.46              14.2%
3Q20                      $42.59              16.8%
4Q20                      $50.45              18.5%
1Q21                      $58.97              16.9%
2Q21                      $70.62              19.8%
3Q21                      $83.02              17.6%
4Q21 Est                  $96                 15.6%

There are not many SAAS companies that grow at 90% YoY. However, sequential revenue deceleration (of course, there is headwind in law of large numbers) might communicate that it may not continue to accelerate revenue at 90% but might still grow at 80% YoY. Would revenue deceleration be a concern or would you still keep it as there are not many companies that could grow 80% YoY?

“It’s about the sustainability of future revenue growth”…, I am trying to see how others use evaluation frameworks to assess it as it’s been one of the toughest challenge for me