DDOG vs SPLK

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Hi all,

as part of my updating my thinking on DDOG, I looked in more depth at SPLK. SPLK is a bit of a grand-daddy in the machine data space, although not a bunch older than Datadog. It IPO’d in 2012, vs DDOG in 2019.

Splunk has been on a “shift to the cloud” transformation over the last few years. It’s share price has not performed well, peaking at around $220 in mid-2020, falling to $110 in June this year, then growing to $150 now. They fell because they missed revenue targets due to some big contracts not renewing when they thought.

Datadog hasn’t been a stellar performer over the last year or so overall, peaking at $112 mid-2020 and up to $135 now after a great earnings report.

My interest is in the cloud business, trying to compare Splunk Cloud business to Datadog. So here goes:


SPLK	Q3 2021   	Q4 2021		Q1 2022	        Q2 2022
Cloud	$144,714	$171,396	$193,958	$217,422
yoy	80%		72%		73%		73%
q-1	15%		18%		13%		12%
-----------
DD	Q3 2020		Q4 2020		Q1 2021		Q2 2021
Revenue	 154,675	177,531		198,549		233,549
q-1 	 10%		15%		11.8%		17.6%
yoy 	 61.3%		56.2%		51.3%		66.8%

On the face of it, Splunk Cloud is doing pretty well.

They’re spending a ton! on Sales and Marketing, TTM $1.4b vs Datadog $250m, but thats not an apples-to-apples comp since they’ve also got a lot of revenue from their on-prem business and maintenance and services revenue (TTM Revenue all up is $2.4b). They’re also spending a lot on R&D ($908m vs $298m TTM).

The biggest difference between the 2 cloud businesses is Splunk Gross margin is only 55% versus Datadog at 76%, so that a big different in gross profit dollars.

Note that I’m ignoring Splunks other businesses (on-prem licenses and maintenance and services).

Splunks EV is about $26b, so just considering TTM cloud revenue, TTM EV/S is 36. Datadog TTM EV/S is 55. Splunk don’t guide to Cloud only revenue, but DDOGs full year EV/S comes down to about 44.

So a question for the board: Why do we love Datadog, but have no love for Splunk, given the Cloud business is growing similarly to Datadog, Splunk have 92 of the Fortune 100 as customers (who are likely to be transitioned to Cloud spend), they probably have around the same number of >$1m Cloud ARR customers (234 - DDOG reported 97 Q4 2020).

Is it just the gross margin for Cloud which at 55% is pretty rubbish? Or they’re spending too much of S&M? Or is it something else?

Interested in everyones thoughts

cheers
Greg

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2

I think you can lump in Elastic as well with Splunk, as they both are in transition from on-prem to Cloud. Elastic has 75.6% Gross margins (pretty steadily) with current growth rates of 50% vs DDOG’s 67%. Both Splunk and Elastic trade at much lower EV/S or P/S ratios, as you note.

I think the answer is because there’s a lot of moving parts to move those businesses to the cloud and Datadog is there, focusing on Land/Expand and growing their ARR. There’s a lot that can go wrong with that transition (i.e we must rely on hope, a four letter word).

They are both worth keeping an eye on for now, but Datadog has no such distraction.

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