We don’t know the final bottom of this bear market. (given)
We don’t know the final “fair” multiples the growth cloud/SaaS stocks will plateau at. (given)
Not all stocks created equal. More mature and/or slower-growers should have lower multiples than the DDOG’s of the world. (given)
Here is some Dreamer crappy public school napkin math:
I saw a tweet from Jamin Ball stating the MEDIAN for cloud hit 5 P/S today. That is the low for past 10 years. Again, that doesn’t mean DDOG should be 5, as they are above average and/or elite compared to most cloud stocks.
But in trying to model for CAGR, which is all I ever care about for my port, at what point is DDOG investable long-term, and are we actually closer than we think? Part of this math is contingent, of course, on growth rates continuing. My assumptions were something like 55% next couple years and a downshift into 45% and then 40%. Which may be conservative or may be too optimistic. Hard to see, the future is - Yoda.
What I always have trouble factoring in is the stock comp. I haven’t seen AJ/Phoolio in ages it seems, but I think he was good at that sort of thing. While you can get a P/S based on revenues, ultimately I think about CAGR in terms of stock price starting point and ending point, and I think mkt cap is a good correlation.
Anyway, if you think DDOG can do these types of rev numbers, and you buy the idea that an “end state” P/S of 5 is more for a 25% or less type grower, can you envision a 2027 DDOG with $12b/yr rev clocking in around 6.5 P/S, for nearly a 25-30% CAGR over those 5 years?
Datadog has an Observability platform that combines infrastructure, APM and logs monitoring, that is used by DevOps professionals to monitor customer-facing real-time digital applications.
And so how do we think about this? We think that we are very early in this transition of workloads to the cloud and digital applications, and that most cust – companies are potential customers.
So we want to be a centralized platform for professionals who are in DevOps to be conducting their business every day, and that includes monitoring that may include security that may include workflows that may include using BI to see what’s going on in the business.
But we want to be that platform that clients can get the value-added out and constantly expand that functionality to be that one platform they can rely on to do their work in this area. And I think that’s always been Oli’s vision for Datadog and something that we have been relentlessly building towards through product innovation.
Hi, Dreamer. I spent probably 2 hours working on a reply, making a spreadsheet of a couple of year’s financials. Of course that just provides a refresher on background. The determinate is the future growth and, I suppose, some justification for that prediction, TAM, TAM growth, % penetration currently, required % penetration to achieve predicted revenue growth, and then–if we are looking 5 years out, what P/S is applied and why or why not use NOW or CRM’s terminal P/S. A work in progress, but a welcome one because DDOG is almost 4% of the port and I have puts in place. I hope to finish my input today–for whatever it may be worth (and it is free).
The devil in all this is in the “napkin math” What Dreamer is modeling here is y-o-y growth rates of 54%, 54%, 50%, 42%, 41%. But we should have some sort of theorem to base these rates on. The general theory of high growth investing is the “S” curve. Barring the realities of innovation, competition, etc., future growth should reflect the past growth and changes in growth rate. Then we need to realize that the “S” curve can be represented by the revenue plot, but the theory is based on the % penetration of the SAM, i.e., SOM vs. SAM.
It just happened that I read JonWayne’s post on SNOW in which he references some “authority’s” decision to model future revenue growth as previous year’s less 20%. And this led me back to DDOG and, I think, a year 0 rate of 70% and that led me to set up in a far corner of my DDOG valuation forecast spreadsheet, a chart of revenue with with variables of initial growth rate and annual decrease in growth rate. The “napkin math” represents more or less 6% annual decrease of a 54% year 1 growth rate and 1.36B year 0 Revenue this results in an “S” curve that devours the universe with a 30-ish% capture of the DDOG 2025 forecasted $53B TAM for observability software for enterprises… I would note that DDOG has 3.25% of the current TAM, I think. When I say “devours the universe”, I mean that the inflection point where the curve bends over is decades out there due to the mere 6% decline.
Today is another validation of your POMO. And here comes ZS, which was called away from me on 9/9 (half my position) at $150 and I sold the other at $188 on that expiration Friday. Much hand wringing at the time. Today, trading at $139.96. POMO, it will come to you.
Getting back to DDOG, it is now 5.5% of port and I’m o.k. with that. It is a good day to be 28% in SPG, down 0.7%. And OKE down 0.06%. Friday we get a relief rally.
G[quote=“Oforfive, post:11, topic:77887”] Getting back to DDOG, it is now 5.5% of port and I’m o.k. with that. It is a good day to be 28% in SPG, down 0.7%. And OKE down 0.06%. Friday we get a relief rally.
Relief rally was already in progress, it seems. SPG ended at up 2.3%, OKE closed up 4.15%.
DDOG closed down 1.7% but I made a few pennies because my $77.50 purchase closed up 4.3%.
Let’s see, my lowball GF60days limit order for BRZE filled at $28.79. And in a blast from the past, I received a notice that IPGP hit my target price of $81. I wonder how long ago that alert was set?
The current debacle is not unprecedented, but you have to go back to 2008/2009 to see anything similar. The length and depth of this “correction” is… well, it isn’t shocking–I mean we just look at our portfolios and say, “Yep, me too.”
If we look out 2 years, we might revert to the 16-year CAGR of 23%, which CRM has routinely tracked except for 2008/2009 and the last year. That is currently $312. Even the minus 1 RMS is at $245 and minus 2 RMS is $192. (Current is $145). So with regard to DDOG and the thought experiment, the current P/S for CRM is quite compressed and if we are investing for post-recession, the outlook is more favorable.
So I want to say CRM was closer to 4 or 5 P/S and NOW was closer to 10 or 11. So I conservatively split the difference and said 6.5 P/S for DDOG at end of 2025.
To an earlier point of yours, the devil is in the details of the projected growth rates I assigned. Should those not hold, then the math is as flimsy as the napkin it was scribbled on.
From a tech standpoint, NOW and CRM are true user platforms, and may have an inherently higher value than DDOG. That may or may not be a fair statement, but security (or monitoring) for many companies can be considered a nice-to-have vs need-to-have. I still struggle a bit with how mission-critical DDOG is, and how much moat it has in switching costs. I know it is more critical than MNDY, as an example, but compared to NOW or CRM in an enterprise?
While I understand DDOG somewhat better now, I still don’t get how data monitoring has a moat - the data is there for anyone to monitor, using the right tools.
Anyway, not fundamentally based but, DDOG’s stock price has a $3.97 gap (from 57.16 to 61.13) in May 2020 that has not been closed, which is now coming into play. Almost all gaps are closed fully or partially over time, if only for a few minutes on a post-earnings spike down, so if you think you will still like DDOG after an earnings miss a limit order below $61 may make sense.
On behalf of Saul, I would like to express my outrage at your audacity to assume DDOG could go even a penny lower! HOW DARE YOU, SIR!!!
The thought would be “if you believe in company, why wait to buy???”
Of course, that sentiment was echoed by Saul to some poor schmuck who dared think about waiting for $135 when the stock was in the $150s or so, just a few months back.
Why wait? Well. I am public-school educated, but my napkin math says a cost basis of $61 or $75 somehow yields a better CAGR over a cost basis of $151.
But what the heck do I know…I didn’t make 200%+ in 2020. I only made 77%.
Of course I am down 13% now, with markets at lows, and those 200% geniuses from almost 30 months ago are about 50-60% down this year, erasing pretty much all of 2021 and most of 2020 gains at this point, I imagine. But who’s counting.