using RPO it is clear that future growth rates are declining
RPO isn’t a great leading indicator either. In boom times like 2021, Datadog’s customers were signing increasingly longer contracts, so RPO was growing even faster than revenue. This year customers are exceedingly cautious, so RPO is barely budging. The faster RPO growth (then) didn’t portend a faster revenue growth in the future (now). In fact, revenue grew slower this quarter than the last few. “Current RPO” or “cRPO” is the RPO that will be recognized in the next 12 months. But even with that, a slow down could hypothetically just mean that customers want to pay month to month, so they’re not signing contracts even for 1 year. (I don’t know if Datadog even allows this which is why I said hypothetically.)
But the point is, revenue isn’t so easy to predict. Rex pointed to a plausible rosy scenario: Datadog usually beats its guidance by 7-8% but with this extra conservative guide, I would not be surprised to see a 9-10% beat next quarter assuming trends continue to improve as they did in July. I might be a little surprised, but it’s possible. And even with an optimistic 10% beat, YoY growth will dip to the high 60’s. But if the beat is lower than it was this quarter, we could be looking at low 60’s growth. We’ve got more math problems in Q4…but actually, I think it’s fine. Deceleration is normal and fine at their scale, and I think it would be a little silly for us to expect them to grow more than 60-something percent again. In fact they might very well grow 50-something percent for a while or for the foreseeable future. No real problem with that, as long as the business matures nicely.
However, I couldn’t help but notice (since I called Zscaler out for this) that Datadog’s revenue growth rate, 74%, was slower than the GAAP OpEx increase, 76%. Might be a blip that snaps back into line next quarter, but I was surprised to see spending up.
Lastly, I agree with those who are bothered by the CFO’s comments in June. Perhaps he couldn’t give an update on what he was seeing since they reported Q1, but he could have left out the phrase, “we really haven’t seen any effect yet,” when in fact, they had. Not saying he was intentionally being dishonest, but as a shareholder I was misled, whether that’s my fault or his.
So a few yellow flags have popped up! Because of that, I’ve updated my conviction level on Datadog. I no longer believe that Datadog is head and shoulders ahead of the rest. I guess I feel like the Dog has come back to the pack a bit. I’m adjusting accordingly – I’ll say more in my August portfolio summary, but honestly, you can probably guess what I’m doing. I wish I had a new great company in the $5b to $20b market cap range to plow money into, but I don’t. Let’s all find one!
Bear
PS – I agree with Rex and others. Thesis isn’t busted. This just wasn’t the best quarter, and where there were no flags previously, now there are.