DDOG with a nice AH bump

Now tell me why anyone WOULD choose Elastic over Datadog?

Wading into waters here above my technical knowledge

1: DDOG relies heavily on ESTC
2: DDOG is eating up ground in APM space, but has shown no expansion…emerging market and NEWR is victim
3: ESTC has yet to report earnings, but is one of the most confident guides in the SaaS world
4: ESTC has many more future market options than APM

The market rewards acceleration. DDOG certainly is a worth stick. But it shouldn’t be ONE or the OTHER.

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when he was pounding the table for one 3D printing company over another. He said why would you choose company XXZ when PSIX has numbers that are sooo much more favorable???

As I recall they were not 3D printing but Nat. Gas engine companies. Westport was the company with dubious profitability. Things went very sour for Westport. (Although ironically you could have trebled your money if you waited for it to sink to a dollar before investing).

Saul was equally prescient then as he is now, although his investing criteria have changed considerably.

A unique talent.

Ian

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I get Saul’s argument and I get Dreamer’s.

DataDog is growing faster and accelerated and is loosing less. And is valued much higher. So upside will be limited by that but still, with those fundamentals…

Elastic is looking like accelerating growth again as well. This is a wide open industry that is very valuable to companies. And Elastic is showing substantial losses which will also limit upside. But they have a more attractive valuation. But they aren’t cheap. They are valued higher than AYX on P/S. So the market is NOT kicking them to the curb either.

And they haven’t been going to the toilet and flushing cash.

Here’s a not all encompassing list of the product expansion Elastic has added since IPO. They’ve been busy.

-Infrastructure Monitoring
-APM
-SIEM
-EndPoint
-Enterprise Search
-On Prem Site Search
-On Prem App Search
-Elasticsearch Service on GCP
-Elasticsearch Service on Azure
-New Availability Zones for AWS, GCP, and Azure

Elastic has been in this space for years but they did not have out of the box solutions, so they have been spending on making that happen.

With all the green fields for both DDOG and ESTC and all the applications and logs and data points not being monitored, this full stack visibility market has a huge amount of headroom.

Elastic being the search core has a lot more optionality for the platform, but DataDog is a force of nature in the observability space. Undeniably.

Long both

Darth

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As I recall they were not 3D printing but Nat. Gas engine companies. Westport was the company with dubious profitability. Things went very sour for Westport. (Although ironically you could have trebled your money if you waited for it to sink to a dollar before investing).

Saul was equally prescient then as he is now, although his investing criteria have changed considerably.

Thanks Ian, for your kind words. Yes it was Westport, which at the time was a MF darling and used in all their advertising. It was selling at about $31 when I wrote about it. As I remember, it had revenue of about $30 m1llion in the most recent quarter, and losses of $36 million. Note: that wasn’t expenses of $36 million, and losses of $6 million, it was LOSSES of $36 million which meant costs of $66 million (give or take). And they had gross margins of 28%. I pointed out that even at 30% margins they would only bring in another $9 million in gross margin if revenue rose 100%, so they would have to quintuple their revenue (up 400%) in order to break even. And that was with five times sales but no increase in operating expenses! And management was predicting 15% growth. In other words it was impossible to break even.

I tried several times to warn people. They hated me, just hated me, for saying this because they had truly fallen in love with the stock. I got so many posts attacking me. As you pointed out the stock fell from $31.00 when I wrote, to $1.28. (It’s now at $2.56). The numbers do matter. The ability to become profitable does matter.

It was Westport that kind of made me famous on the MF.

Best,

Saul

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If we are looking for a reason, to buy, we will find one. Whether it is where DDOG is in the S-curve, path to profitability or whatever. However, I believe we are left stretching our head with this one. Is the market rational?

I guess we all have a short memory even though we all suffered this high valuation sector rotation.

I did the unthinkable going against Saul and several others and sold my small 2% position in DDOG – mainly because of valuation. The other metrics are fantastic, but I can’t leave out valuation now.

Other than perhaps ZM, this valuation is ridiculously high compare to our other SaaS companies. I use the funds to add more AYX, the best bargain in the entire lot.

That said, with all these new IPOs giving us a bargain around lockup expiration date, I would revisit this stock around data time. CRWD is coming up Dec 12!

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I get Saul’s argument and I get Dreamer’s.

DataDog is growing faster and accelerated and is loosing less. And is valued much higher. So upside will be limited by that but still, with those fundamentals…

Long both

I agree, Darth. Maybe another way to say it is that with companies burning as much cash as ESTC, the valuation will definitely be lower. But that means more potential if we’re right about the company.

That seems to be Dreamer’s point. More potential long term. Saul’s point seems to be, more certainty short term. Like, here’s a company who is already showing results. We’re not techies, so why bet that ESTC will figure out the profitability thing later and that the market will again love it.

I think that’s exactly what Dreamer and the rest of us are betting on with ESTC…and others like MDB.

Maybe a better challenge for Saul: Why do you feel differently about ESTC than MDB?

Bear
Also long both, although I’m trimming DDOG a bit today. $12 billion is just a lot for a company that surpassed $300m in TTM revenue less than 24 hours ago!

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The problem with this kind of comparison is that it is static, it does not take into account where the companies are in their lifetimes, where they are on their “S” curves. You can’t compare the productivity of an adult vs. a child. David Skok’s presentations make this very clear, at the start SaaS is in the land and expand phase with negative earnings and negative cash flow in the expectation of generating a positive CAC to LTV relationship. He specifically mentions that often this is not understood even at BOD levels.

How do AYX and DDOG compare? Yahoo says:

DDOD: The company was founded in 2010 and is headquartered in New York, New York.
AYX: Alteryx, Inc. was founded in 1997 and is headquartered in Irvine, California.

AYX has a 13 year head start…

Denny,

I think that you are implying here that AYX is an adult and DDOG is a child? This is probably not the best example because AYX was sort of a dormant slow grower for many years and its product only more recently hit product-market fit with the market being large enough to enable hyper growth. So I would say that both companies are children and the date of their founding is not so relevant. What is relevant is how much of their TAM they have captured to date. AYX seems to have captured only a tiny sliver of their potential and unless they somehow get disrupted or unless they see another firm rise to offer a competitive substitute then AYX should continue its rapid rather with high gross margins.

Chris

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I did the unthinkable going against Saul and several others and sold my small 2% position in DDOG – mainly because of valuation. The other metrics are fantastic, but I can’t leave out valuation now.

I’m trimming DDOG a bit today. $12 billion is just a lot for a company that surpassed $300m in TTM revenue less than 24 hours ago!

Well it’s now up 21%. Today! Why be in Motley Fool if you feel that way? David Gardner has always said he wouldn’t buy a stock unless it was being attacked for being overvalued. Every stock in my portfolio is “overvalued” but the portfolio is up about 6 percentage points today. If you want “value” you can buy the IJS, S&P, Dow, Russell, Nasdaq, all of which are down today.

As someone just wrote, Datadog is obviously a “force of nature.”

You know, you can never make a quadruple on a stock if you sell it because it’s up 20%.

Saul

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Denny,

Are you saying that because AYX is an older company, it’s further along it’s S Curve? Which is obviously not true. IBM was on the growth portion of it’s S Curve for over half a century. AYX just had it’s highest revenue growth since it’s IPO last quarter.

The market, in all it’s infinite wisdom, did not have any problem bidding up PagerDuty to 23 on the day of it’s IPO, then see it’s share price go up another 50% over the next few months, only to now be trading at half of it’s IPO price as well as 60% of it’s ATH. The market was absolutely clueless in PD’s looming “end of the S Curve” in only the next few months. These “end of the S Curves” and where they are on the S Curve is very messy math and not clear whatsoever, even to the infinite wisdom of the market.

My opinion is as I said, the market has been favoring IPOs over established companies in the SaaS space this year, and now, after the WeWork fiasco, is favoring companies with path to short term profitability, rather than companies running losses favoring expansion instead. This does not mean the market is right and wise.

As for ESTC, the largest portion of it’s TAM is in APM. DDOG is clearly showing more traction in ESTC’s biggest space, and just because you have your hand in a bunch of pots doesn’t mean you have the ability or resources to compete successfully in all of them. Do we really think ESTC is going to be DDOG+CRWD+SPLK combined market cap in a few years because it has an offering in all these markets?

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I guess we all have a short memory even though we all suffered this high valuation sector rotation.

Oh I missed this one. Even with the “high-value rotation” none of us ever even came down to breakeven for the year. We were all always positive for the year, most who posted were up still 20% to 35% even at the bottom. Hardly a tragedy. Give me a break!

Saul

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$12 billion is just a lot for a company that surpassed $300m in TTM revenue less than 24 hours ago!

Me too Bear. Still keeping a position. They’re great. But it’s upside from here right? DataDog checks all the boxes but market cap getting ahead of itself, maybe? Will the multiple continue to expand beyond 40? 45?

But that means more potential if we’re right about the company.

That’s the thesis anyways. I see what Elastic is doing. The totality of where Elastic is used is amazing. Without going through the full list, dozens of companies use Elastic in their product offerings. And then many many more use Elastic in a home grown solution to accomplish these use cases. So Elastic has invested (heavily) recently and currently to make their platform do all of these things out of the box. And that investment has gone side by side with massive scale out of their hosted Elasticsearch Service. As well as building out personnel and infrastructure as they see enormous opportunity to go and get. These efforts succeed or fail. There is risk, but much opportunity.

But just looking at SaaS. Comparable quarter to current is $10M. They did $17.5M in SaaS last quarter up $4M+ sequentially. So if they only add $2.5M this quarter, SaaS accelerated to 100% growth (from 71%). Is that not worth the investment?. And because it comes from $10M, it’s easy to visualize the growth. Each million over $2.5M is 10% more growth.

Below is a discussion on ESTC spending, sorry to high Jack the DDOG thread.

Now, turning to profitability, which is non-GAAP, gross profit in the first quarter was $65.7 million, representing a gross margin of 73.3%. Total subscriptions gross margin was 80.2%, up slightly sequentially. We are tracking well relative to our expectations. In the near term, we will continue to invest in our SaaS business, which will remain a modest headwind to gross margin overall.

Turning now to operating expenses. We remain focused on investing to drive top-line growth. As a reminder, we changed the timing of certain events and hosted our global all-hands meeting in Orlando in May. This was reflected in all the operating expense lines. This shift in timing towards Q1 does not impact the full-year expense total.

Sales and marketing expense in Q1 was $47.1 million, up 65% year over year, representing 52% of total revenue. Our overall approach to sales and marketing investments remains unchanged. We will continue to add sales capacity and expand market coverage as we drive growth and expect to realize leverage gradually over the longer term as we scale.

R&D expense in Q1 was $29.4 million, up 76% year over year, representing 33% of total revenue. As we said before, we are increasing our investments in R&D this year as we continue to invest heavily in both existing and new products and features.

Darth

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“Why be in Motley Fool if you feel that way? David Gardner has always said he wouldn’t buy a stock unless it was being attacked for being overvalued.”

Excellent point above, especially for these current times during this market “rotation” away from high growth!

Let’s not forget that David Gardner has also said that he would prefer to buy a stock at or near the 52 week high because he believes that “winners win”. With that said, there is plenty of seats remaining on the DDOG bandwagon! Don’t be afraid! Jump aboard! I’m just glad I bought my tickets when they were on sale!

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Chris, I realize that making comparisons is hard because the data is iffy. That said, I stand by the need to take into account where on the “S” curve the technology is. That and not the age difference between the two companies was at the core of my post.

Denny Schlesinger

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Bear: I’m trimming DDOG a bit today. $12 billion is just a lot for a company that surpassed $300m in TTM revenue less than 24 hours ago!

Saul: Why be in Motley Fool if you feel that way?
As someone just wrote, Datadog is obviously a “force of nature.”
You know, you can never make a quadruple on a stock if you sell it because it’s up 20%.

I’m on these boards at the Motley Fool for these awesome discussions! :slight_smile:

The phrase “force of nature” doesn’t help me. Is it a force of nature like Netflix, or Chipotle, or Amazon? For the record I think Amazon is a reasonable “buy” right now (and most always), but Netflix and Chipotle have issues. In large part, those issues have to do with the valuations of the companies vs their TAMs.

DDOG probably isn’t anywhere close to running into its TAM. But you say we can’t quadruple our money if we sell now. Saul, for DDOG to quadruple it would have to become about a $50 billion company (I know 12b x 4 = 42 billion, but you have to bake in some dilution too). I’m sorry, but if you’re betting on that in the next few years, you’ve got some serious rose colored glasses. If DDOG even doubled it would be quite a large company. The only companies we’ve discussed much here (in the last year or so) that are over $30 billion are Shopify and Square. And they have many times as much revenue as DDOG.

DDOG may very well get to a $30 billion valuation or even 50 billion. But it will take many, many years.

Bear

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Are you saying that because AYX is an older company, it’s further along it’s S Curve?

No. The “S” curve applies to technologies, not to individual companies selling the technology. But a company successfully selling that technology will also exhibit the grow pattern.

IBM has enjoyed many “S” curves because it has been successful in many technologies.

The market, in all it’s infinite wisdom, did not have any problem bidding up PagerDuty to 23 on the day of it’s IPO, then see it’s share price go up another 50% over the next few months, only to now be trading at half of it’s IPO price as well as 60% of it’s ATH.

I didn’t say that the “S” curve is all that matters. The market is a complex system driven by “animal spirits” to misquote Lord Keynes.

To get back on track, my point is that relying on a set of numbers to compare stocks is a common idea but a misguided one because we are dealing with complex systems.

Denny Schlesinger

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Well it’s now up 21%. Today! Why be in Motley Fool if you feel that way? David Gardner has always said he wouldn’t buy a stock unless it was being attacked for being overvalued. Every stock in my portfolio is “overvalued” but the portfolio is up about 6 percentage points today. If you want “value” you can buy the IJS, S&P, Dow, Russell, Nasdaq, all of which are down today.

As someone just wrote, Datadog is obviously a “force of nature.”

You know, you can never make a quadruple on a stock if you sell it because it’s up 20%.

I have a small position in DDOG (1% only). I couldn’t add to it because it was too expensive. If it would grow 4x it would be a $45B company. Maybe that will happen. If we look at the Salesforce.com example (the poster child of a successful SaaS company that has grown into a dominant megacap: https://discussion.fool.com/crm-a-case-study-for-saas-companies-… )
then we can see the path that DDOG could take. Ultimately, DDOG will be valued on FCF and growth of FCF.

Starting with revenue growth and gross margins we might get to an estimate of FCF margin. Let’s do some math:

TTM revenue is $310M and the revenue growth rate is 88%. Revenue growth is still accelerating which is very nice. We need to make an assumption on future revenue growth to arrive at revenue. Let’s assume that DDOG can grow 85% (on average) for 5 years. You get TTM revenue of about $6.7B after 5 years. If they grow only 70%, 60%, and 50% on average then the TTM revenue after 5 years would be $4.4B, $3.25B, and $2.35B, respectively.

Gross margins are 76% and have been in the range of 73%-79% for the past 11 quarters (as long as data was available). So let’s assume gross margins are going to stay about the same at around 76%. By comparison, CRM has gross margins in the low 80%s (if I recall correctly). AYX has gross margins of 92%. Gross margin is will be an important determining factor in how high the FCF margin can be. 92% > 83% > 76%.

CRM has had a consistent (more or less) FCF margin of around 21% for many years. AYX is targeting FCF margin of 30-35% at scale. A question is where will DDOG end up at scale. Will it be lower than CRM because it has lower margins? Or will DDOG manage to be operationally more efficient than CRM at scale? With lower gross margins (76% versus 83%), I think it will be a real challenge for DDOG to have FCF margins above 20%. Perhaps someone can argue that DDOG can be more operationally efficient that CRM but I’d love to hear the reasons.

TTM FCF after 5 years:


5yrGr  TTMrev    FCFmar   TTMFCF
85%    $6.7B     20%      $1.34B 
70%    $4.4B     20%      $0.88B
60%    $3.25B    20%      $0.65B
50%    $2.35B    20%      $0.47B

So what multiple on FCF should a company at scale have? Well, if the revenue growth rate is higher then it deserves a higher multiple. Currently, CRM as a TTM FCF multiple of 43 and it’s growing revenue at 25%. The highest FCF multiple CRM ever had was 73 and it was a $4B TTM revenue company growing at around 35% per year. In the rosiest of rosy scenarios can we give DDOG a TTM FCF multiple of 100? It seems high to me but let’s say it manages to grow on average 85% per year for 5 years and then is still growing 60% after 5 years. Seems very high but let’s crunch the numbers:


5yrGr  TTMrev    FCFmar   TTMFCF  MktCap  Shares  Price  CAGR  FCFmult
85%    $6.7B     20%      $1.34B  $134B   388M    $345   54%   100
70%    $4.4B     20%      $0.88B   $88B   388M    $226   42%   100
60%    $3.25B    20%      $0.65B   $65B   388M    $168   34%   100
50%    $2.35B    20%      $0.47B   $47B   388M    $121   25%   100

In the above calculation I have assumed 6% per year share dilution starting with 295M shares today.

Personally, I am skeptical that DDOG will maintain an 85% growth rate average for 5 years. I think, though that 50-70% is a reasonable guess.

I think that FCF margin of 20% is possible.

I think (just my opinion) 100x TTM FCF after 5 years is too rich. Perhaps, if CRM has a 43 multiple and DDOG is still growing revenue twice as fast (around 50%) after 5 years then it might deserve a multiple of 85. This would result in a share price range from $103 to $192 and a CAGR between 21% and 37%.

So what did we learn from doing this exercise (I know there are a lot of assumptions)? Well, even a company like DDOG that is one of the most highly valued SaaS companies in our universe can still achieve an outstanding return going forward. This is not based on EV/Sales but on a multiple of cash flow.

So what are the ingredients for achieving the success that CRM achieved? Why is Saul so willing to pay up for DDOG and ZM? I think he sees their dominance as much more assured than ESTC’s dominance. I also think that he he sees their path to profitability and lots of FCF generation to be a lot more certain (because their already demonstrating it) than the certainly of profitability for ESTC which is still burning a ton of cash (and going in the wrong direction).

I know that I still like AYX the best. I haven’t been able to add to DDOG, but perhaps I need to do more thinking. I think that thinking will involve assessing my certainty of DDOG continuing it’s rapid growth for an extended period and continuing to show increasing operating leverage.

Chris

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I think some here are missing the point. Saul as I do, try to get in early and if any Company do reach say 50 bill, all well and good. There is a time to get in and time to get out and along the way, take profits, reduce a position to have cash for other opportunities and act accordingly. Let it run until it gets tired. There was a time when 25% increase on one’s port was more than acceptable, in fact downright incredible. How many have forgotten this? Protect your portfolio at all costs. Nobody knows on any individual Company what supposedly will be in a few years, just what’s happening now. Just saying.

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Well it’s now up 21%. Today! Why be in Motley Fool if you feel that way? David Gardner has always said he wouldn’t buy a stock unless it was being attacked for being overvalued. Every stock in my portfolio is “overvalued” but the portfolio is up about 6 percentage points today. If you want “value” you can buy the IJS, S&P, Dow, Russell, Nasdaq, all of which are down today… As someone just wrote, Datadog is obviously a “force of nature.” …You know, you can never make a quadruple on a stock if you sell it because it’s up 20%.

I have a small position in DDOG (1% only). I couldn’t add to it because it was too expensive. If it would grow 4x it would be a $45B company. Maybe that will happen… Revenue growth is still accelerating which is very nice. We need to make an assumption on future revenue growth to arrive at revenue. Let’s assume that DDOG can grow 85% (on average) for 5 years. You get TTM revenue of about $6.7B after 5 years. If they grow only 70%, 60%, and 50% on average then the TTM revenue after 5 years would be $4.4B, $3.25B, and $2.35B, respectively. Gross margins are 76% and have been in the range of 73%-79% for the past 11 quarters (as long as data was available). So let’s assume gross margins are going to stay about the same at around 76%.

Hi Chris,

What I meant by a force of nature is that most of our companies that are growing so fast have huge losses because they are paying so much for S&M to sign people up while the signing is good. Here is Datadog growing at 88%, which is accelerating, by the way, from 76% and 82% the previous two quarters, but it’s so easy to sell their product that they are at breakeven. That’s pretty remarkable. Their dollar based net retention rate is also about as high as it gets. Companies like this are always overvalued.

Here’s part of what Bert wrote to me in an email exchange:

I am glad you have a large position and that I was in some way responsible for you owning the shares. (Saul: His write-up was the most positive I had ever seen him write about any company that he had done a deep dive on… and if you don’t have a subscription yet to his newsletter because you don’t want to spring for a few dollars, you are out of your mind.)… And no, I hardly expected to see 132% growth in bookings - I am amazed, and it was more than a little positive to these old ears for them to talk about not having consulting revenue because users do their own installation. You have no idea how fantastic that is. I really do not totally know if I believe that either-but I suppose it must be so. I would love to see how that works in the real world but that is such a big thing for users.

Do you remember Nov 2008 when everybody sold out and then had post-traumatic stress syndrome and said “No more stocks for me. I learned my lesson! Fooled me once, can’t fool me again.”… And then they missed the next 10 years of a rising market (I was up 115% in 2009). Well I get the feeling that I’m seeing the same kind of post-traumatic stress syndrome now. People are saying rather all-knowingly “No more over-valued stocks for us. We learned our lesson. Fooled us once, can’t fool us again.” And this was a drop that didn’t even take us into negative territory for the year, or even close. It is a matter of perspective.

Saul

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And no, I hardly expected to see 132% growth in bookings<b/b>

Saul, you should know that’s not exactly correct. From the call immediately after the 132% comment:

But to give you an example of the variance between billings and revenue growth, we want to add a few comments.

First, we had a multimillion dollar deal which was renewed and billed in Q3 2019. This customer was not billed in Q3 three last year. In addition, we had one large two-year prepaid deal in Q3 2017, which was thus not billed in Q3 2018, but was billed again in Q3 2019. Adjusting for these two customers, normalized calculated billings growth would have been approximately 100%, still very strong and generally reflective of our strong Q3 sales.

Two large customers that were not billed in comparable quarter (Q3 2018) and will not be billed in next comparable quarter (Q3 2020)

Darth

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Hi Darth, that’s why all these companies tell us that Billings are lumpy. However, I’ll accept 100% :grinning::grinning:
Saul

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