DDOG has no real competition left

Investment Analysis Clubs Saul’s Investing Discussions
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OK, I am not going to start off by asking about who let the canine out. In terms of DDOG, the pet is already out of the kennel and it is racing down the track well ahead of any competition. In fact on the earnings call, the CEO, Olivier Pomel, stated that they don’t really see the competition much in sales and bidding situations. Now that’s lovely - there is no competition to speak of. If there was ever a company that was a pure-play cloud company, with a strong tailwind behind their backs, and nothing to stop them from taking virgin market share….that company is called DataDog. Floki, the Norseman, has landed on the shores of Iceland and the entire island is his for the taking.

Here is what stood out to me in DDOG’s Q4 earnings report:
refer to the detailed DDOG financials map here: https://beachman.substack.com/p/ddog-has-no-real-competition…

Revenue growth - Q4 YOY revenue (84%) handily beat guidance by a whopping 20% and annual revenue rose 70% YOY (a beat of 5%). Sequential QOQ revenue beat guidance by a full 13% and grew double digits by 21%. They guided for $339M revenue in Q1 2022 and for $1,530M in full year 2022. Deferred revenue (a sign of contracted revenue that will be booked in future quarters) grew 82% YOY and 24% QOQ to $372M. Their recent FedRamp Moderate approval will start feeding additional growth into the pipeline with larger $1M+ contracts.

Profitability - Gross margin is 79% and steadily creeping up to the 80% level that they promised when they IPOed. Net income was $7M and it will be interesting to watch whether they stay in the green going forward. Non-GAAP P/L per share beat Q4 guidance by 67%!

Cashflow - They generated operating cash flow of $287M and free cash flow of $251M in FY2021. Healthy and steady QOQ cash flow generation for 4 quarters straight.

Market share - DBNRR has been at / above 130% for 18 consecutive quarters…think about the market dominance demonstrated by this metric. Once a DDOG customer, you tend to keep buying more. Most customers start a new contract with at least 2+ products and this cohort is growing 78% YOY. Customer with 4+ products grew 33% YOY and large customer with > $1M contracts grew 114% YOY.

Debt - remains steady at $735M along with about $1.6B cash on the balance sheet which is being continually replenished by increasing operating and free cash flow.

Product - Product innovation continues with the launch of Sensitive Data Scanner, Online Archives, the acquisition of CoScreen and OZcode, 80 new integrations and a lot more. New and expanded partnerships were announced with AWS and Confluent. Their new foray into cloud security is intriguing and could lead to significant TAM additions.

So here is my plan regarding DDOG:

My conviction in DDOG has increased with this Q4 2021 earnings report. I re-scored the company using my analysis method and their score jumped 2 points to take the top spot in my rankings - major improvements in cash flow helped bump up their score.

Elevator pitch - I own DDOG because I consider them to be the dominant cloud infrastructure company, by all measures. The cloud migration secular trend is not going away and DDOG does not seem to have any significant competition today. Their products are top-notch, customers love them and keep buying more and the switching costs are getting higher.

Beachman’s plan - I am currently at a 7% position in DDOG and would like to buy 1-2 more tranches to get to about 10%. I will add anywhere from $135 and below (watching the 200day MA on the daily chart).

Beachman @Iwannabeontheb2

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Thank you for posting. This is my impression as well. There used to be a few players: Dynatrace, New Relic, Sumo Logic etc that were in the APM space as of two years ago. As far as I can tell, today Datadog has become the de factor APM for all three major clouds AWS, Azure, GCP for starting a new cloud stack or migrating from on-prem. Their APM product is simply a lot better than the others. Case in point: our company used to be on New Relic monitoring AWS containers. Switched to Datadog three years ago and never looked back.

In the meantime they are still expanding into the log aggregation space and eating market share from Splunk, Sumo Logic etc.

(P.S. APM = capture the events
Log aggregation = summarize what’s happening with those events)

I believe the current revenue growth in Datadog is mostly from the on-prem to cloud migration in the last few years. Every new container created today is likely equipped with Datadog. In other words, their growth is driven by the total number of cloud containers (number of virtual computers) in the world. So whenever you see AWS or Azure posting 40%+ growth, you can be pretty sure Datadog won’t have less than that, since every new container created is new revenue for Datadog. And they are still eating market share from log aggregation players.

I have been asking myself when will I sell Datadog? Probably whenever the big three cloud growth slows down. Datadog does not have exciting product outside of APM or log aggregation. If they want to go into network security, they will face competition from Cloudflare, which I believe is a lot stronger than Datadog here and is as almost as universal as Datadog in a company’s cloud stack. I don’t know where else they can expand. But I feel the end of runway for APM and logging won’t be coming anytime soon. There’s still a crazy shortage of cloud engineers that indicates high demand in migrating to cloud right now.

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Thanks for the “inside” tech read on their product value proposition.

I like your question about when will their growth slow down.

You mention using AWS / Azure growth rates as an indicator. I would consider these lagging indicators because they get reported after the fact…after the sales have been made.

I wonder if there are any leading indicators that might be useful. I look closely at annual CIO surveys for such leading indicators…especially where they are spending current year $s and planning to spend next year $s. In this year’s survey, infosecurity and cloud migration were the top two spend items by a mile.

Cheers!

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It’s a nice summary, Beachman, but I feel like you are still missing a huge part of this board with this statement:

I am currently at a 7% position in DDOG and would like to buy 1-2 more tranches to get to about 10%. I will add anywhere from $135 and below (watching the 200day MA on the daily chart).

If you like the company enough to be your TOP CONVICTION, who cares what price you buy it at today? Will you regret buying it at $175 if its at $275 next year?

I simply can not understand the idea of “This company is killing it, I love what they are doing, they are the absolute best and I want to own more! However, I’m going to wait until it drops 25% until I own more of it.”

Again, great write up, and I agree with your thesis. Own good companies. That’s it. If it’s a great company, why wait for another 25% drop to buy more? I’m afraid you may never get your chance.

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If you like the company enough to be your TOP CONVICTION, who cares what price you buy it at today? Will you regret buying it at $175 if its at $275 next year?

Well, because “price” cuts both ways. It wasn’t too long ago that many people had UPST as their top conviction, and were buying it all the way up to $400. It’s now $100.

It’s okay to be cautious. You can still make money.

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If you like the company enough to be your TOP CONVICTION, who cares what price you buy it at today? Will you regret buying it at $175 if its at $275 next year?

I simply can not understand the idea of “This company is killing it, I love what they are doing, they are the absolute best and I want to own more! However, I’m going to wait until it drops 25% until I own more of it.”

How I buy into stocks that I want to own:

  1. The first tranche is usually a 1/3 ASAP buy of how much I want to own. As soon as I have confirmed that my conviction is high, I buy 1/3rd immediately.

  2. The next two 1/3 buys are usually targeted as specific buy points based on moving averages, points of resistance and points of support. Growth stock prices are volatile and it is fruitful to spend a little time on the charts to identify these specific price points. The trading algos are programmed to do this and as retail investors we can take advantage.

  3. Once I have a full position, I might go overweight or trim in small chunks…again based shifts in conviction level and predicated on moving averages, points of resistance and points of support.

Sure one can buy in all at once. I prefer to maximize my returns using the method above.

I suspect that further discussion on buying/selling/portfolio mgmt is off-topic for this board. Thanks for the great feedback. I always appreciate constructive dialogue.

Beachman (beachman.substack.com)

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My conviction in DDOG has increased… to take the top spot in my rankings - major improvements in cash flow helped bump up their score.

Elevator pitch - I own DDOG because I consider them to be the dominant cloud infrastructure company, by all measures. The cloud migration secular trend is not going away and DDOG does not seem to have any significant competition today. Their products are top-notch, customers love them and keep buying more and the switching costs are getting higher.

Beachman’s plan - I am currently at a 7% position and would like to buy 1-2 more tranches… I will add anywhere from $135 and below

Hi Beachman, I agree that you did an excellent summary, but like Epictetus, I was shocked to see you saying that this is your highest confidence position, and you want to add to your position, but you won’t add except in the unlikely possibility that it drops from its current $167 to $135. Did you forget that you want to add because you think the price is going up, not down?

Considering that it has “top spot” in your rankings and you “consider them to be the dominant cloud infrastructure company, by all measures,” I would assume that you expect them to be able to go up 3 to 5 times from here (or you wouldn’t be adding to your position). Let’s say 4 times the current price. That would be up just 300%, fairly modest for a company growing 80 plus percent (and accelerating).

When the price gets to $668, will you remember or care whether you bought at $135 or $165? I doubt it. Will you be kicking yourself if you didn’t make those buys because you were waiting for an unlikely price? Probably.

Now I didn’t say an impossible price, I said unlikely. Who knows what the market will do if Russia invades the Ukraine. I don’t. (Security stocks might even go up).

Best, and thanks for the nice write-up.

Saul

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Stock was $180s in Dec.
Was $119 in Jan.

Thinking it could get back to $135 isnt exactly a stretch with Fed in similar position as Dec 2018.

If he doesnt get it, so be it.
Not sure why he cant want better entries for better CAGR.

Dreamer

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Stock was $180s in Dec.
Was $119 in Jan.

Thinking it could get back to $135 isnt exactly a stretch with Fed in similar position as Dec 2018.

If he doesnt get it, so be it.
Not sure why he cant want better entries for better CAGR.

Hi Dreamer and Beachman,

While it is entirely possible for DDOG to drop 20% from its close on Friday to reach $135, it seems to me it would make more sense to have a full position in DDOG today, and simply add more shares if it were to reach $135 in the near future.
Listening to the conference call yields confidence in why I don’t think it’s likely for DDOG to fall 20% anytime soon. (and if does, then I will be happy buying more - unless the drop was due to an unforeseen black swan event specific against the company)

Analyst question: “I want to ask the competitive question, particularly important given that you had two public comps that have less than impressive results. So very specifically, where are you winning upmarket?”

CEO: “…we don’t actually see the competition all that much. So I don’t wake up every morning asking myself how are we going to win or whether we are winning. We mostly compete against customers building it themselves or building on their tool then starting in the cloud without a clear idea what’s going on.”

Analyst question: “I wanted to talk a little bit about your comment about the early days of the opportunity…If I look at some of the big software companies that we’ve seen, whether it’s Salesforce or VMware or other large companies, they have north of hundreds of thousands of customers, right? And you’re sort of sitting at 18,000. I was wondering in terms of your guys’ vision, do you envision Datadog getting to this sort of customer count levels?”

CEO: “we build a product and a company that serves the whole market, like the whole gamut of potential customers. We think that developers at small companies behave, especially in the cloud, they have to behave very much the same way as developers in very large enterprises. They have the same toolbox. They work the same way largely. And so we built a product that serves everyone. We do expect to have very large counts of customers in the end…we also see, right now, a lot of the demand, a lot of the growth is coming from mid-market and large enterprises and also the higher end of the market. And we feel good about that part of the market, like we see it successfully standardizing Datadog. We see it successfully land and expand with us. I think we’re growing faster. Well, I would say we’re an equivalent size and growing faster than anybody else in the market for that specific part of the market.”

Just WOW!!!
Datadog sees essentially no competition! The very title of your thread!
We saw Dynatrace and New Relic both get their stock price absolutely curb-stomped when they issued guidance earlier this month at lighter than what the market wanted, because Datadog is eating everyone’s lunch.
This isn’t a decelerating Crowdstrike versus accelerating-but-unprofitable SentinelOne battle going on.
This isn’t a ‘story-stock’ like Cloudflare (which is how I actually perceive it, but I still own it for the narrative of hypergrowth durability).
This is an already accelerating-and-durable-hypergrowing Datadog, and that’s really it - I mean look - the CEO says he expects Datadog to become the industry standard!

And the CEO thinks Datadog can eventually accumulate the same number of customers as Salesforce, in the hundreds of thousands range! Reaching 150,000 customers like Salesforce at the end would be 8 times greater than what Datadog has now - they were only at 18800 last quarter. It’s easy for the CEO, and us, to believe it’s still early days.

If I didn’t already own DDOG at now 30+% allocation, I certainly wouldn’t want to miss out on today’s prices.

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Reaching 150,000 customers like Salesforce at the end would be 8 times greater than what Datadog has now

——

If CRM is a goal and a success story at $22b/yr with a $200b mkt cap, then DDOG CAGR may be limited.

It will conservatively take DDOG 10 years to hit that revenue. If they wind up w same multiple and resulting mkt cap as CRM, that would be a 13-14% CAGR over that period.

ZM already at $4b runrate and smaller mkt cap than ddog. Once growth slows at all, multiple shrinks too.

Maybe they can hit $4b/yr in 3 yesrs and still have a 50 multiple for a $200b mkt cap. That would be a whopping 53% cagr.

ADBE has $225b mkt cap off $16b rev, in comparison.

NOW is $116b mkt cap off $6b revenue.

All rests on what multiple market is willing to assign them.

Dreamer

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I will add anywhere from $135 and below

Thinking it could get back to $135 isnt exactly a stretch with Fed in similar position as Dec 2018.

Listening to the conference call yields confidence in why I don’t think it’s likely for DDOG to fall 20% anytime soon

I want to emphasize Jon’s point on the unlikeliness on Datadog reaching $135, because it is a key reason why growth investing works. That is, how time is hypergrowth’s best friend, and share prices of hypergrowers become “coiled springs” during sharp decreases.

At the very bottom of the recent drawdown, Datadog’s stock reached $125. At that point, their “next twelve months (NTM)” revenue was estimated to be $1,302M, or 48% higher than its last twelve months (LTM) [1]. At 306M shares outstanding, that put its lowest valuation at 29x NTMR ([135*306]/1302). Keep in mind that was the lowest low after falling 37%.

Now, as we all know, Datadog recently reported its Q4’2021. It estimated its Q1’2022 revenue to be $339M. Let’s assume that Datadog only beats that guidance by ~6% and reports $360M in Q1, which would be the second lowest beat as a public company ever. Let’s then assume that Datadog only grows at 14% QoQ (after growing at 20% last quarter) and reports $410M in Q2. Let’s then assume that Datadog gradually slows to 13% QoQ and reports $464M in Q3. Finally, let’s assume it slows two percentage points and only grows 11% QoQ, reporting $515M in Q4.

So, if we add those four conservative assumptions (361 + 412+ 465 + 516) we arrive at $1,749M for NTM revenue. Well, if Datadog’s price was to fall to $135, that will put its valuation at:

EV: 306M shares outstanding * $135 = $41,310M
NTM revenue = $1,749
$41,310 / $1,749 = 24x EV/NTMR

In other words, $135 would now put Datadog’s valuation at ~20% cheaper than the bottom it reached a few weeks ago after falling 37%!! Is it possible that this happens? Of course it is. But the chances of that happening are an order of magnitude lower now after reporting a stellar quarter.

$135 a weeks ago represented a 32x EV/NTMR valuation for Datadog. But $135 today means 24x EV/NTMR. And that is one of the key pillars of hypergrowth – every quarter of ‘surprises’ raises the ‘valuation floor’ for these breed of companies.

-RMTZP
Visit https://discussion.fool.com/rules-of-the-board-revised-edition-3… to maximize your learning of the board before posting

[1] https://cloudedjudgement.substack.com/p/clouded-judgement-12…

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It’s not like Adobe, Service Now and Salesforce have exactly peaked in market cap… So I don’t think it’s valid to use a number that simply represents the current point in time. Cloud is growing for some time, early days for them too say some.

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