Don't believe the "mission critical&quo

Financial media and fintwit often latches onto catchy phrases. They repeat these buzz words and evolve their narratives and reporting around them. And these metaphors change from month to month, season to season…from market rally to market dip.

The latest over-used and mis-used business nomenclature is “mission critical”. In an attempt to provide a bull thesis on a company that they like, I am seeing more financial gurus refer to their favorite stock as being mission critical. For most investment recommendations, this is highly misleading and far from true.

What does mission critical mean

From Investopedia,

A mission critical task, service, or system is one whose failure or disruption would cause an entire operation or business to grind to a halt. It is a type of task, service, or system that is indispensable to continuing operations.

Let’s apply this litmus test to a few of our favorite growth companies

DDOG - mission critical? NO. Most companies can still operate without DDOG’s infrastructure monitoring services. They could stop buying more subscriptions. They could start using free/cheaper out-of-the-box monitoring services provided by their cloud vendor. They can still stay in business and survive a possible downturn.

CRWD - mission critical? MAYBE. Companies, large and small, are ripe targets for cyberattacks on a daily basis. And we have seen how these incidents can shut down operations companywide or in a specific geographical region. Hackers steal corporate intellectual property and customer data files. Often they hold the victim’s databases hostage until a ransom is paid. Businesses can survive without cybersecurity defenses until they are attacked and then they become disciples of the need for cyberprotection.

MDB - mission critical? NOPE. There are literally hundreds of database software vendors out there. And chances are that a company already owns/licenses 10-15 of them without needing to buy another one. In today’s economic environment, a CIO will be challenged to justify a large database migration project and tie it back to the company’s mission. About 40% of such projects fail to complete on time and within budget, with a typical cost over-run of about 30%.

SNOW - mission critical? NO. Customers facing budget cuts could decide that they need to reduce their consumption of SNOW’s expensive data services. After all, customers own their business data and could make do with minimal analytics focused on their top strategic customers. When a business is stressed, it dispenses with chasing growth and gets back to the basics…retaining its existing customers while keeping costs as low as possible.

MNDY - mission critical? NO. Employee teams have been operating just fine without the need for project management and collaboration software. They can always use emails, schedule status meetings or pick up the phone.

In reality, the business world is not as black and white as I described above. While some companies will be in survival mode in 2022-2023, others will be looking to grab market share from their weaker competitors. While some are focused on the bottom line, the stronger few will invest in growth and new markets.

The point I am trying to make is that when we hear the term “mission critical”, its best to step back and think about whether that is actually true, for which product and for which slice of the TAM.

Beachman (@Iwannabeontheb2)

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Hey Man of the Beach Variety!

Monkey digs your willingness to parse the euphemisms of the day to get to some hard-hitting truth.

But since we only have one example, and that’s even at a half-mast “maybe” in CRWD, can you bop us again on the nose with a few examples of genuine mission-critical companies for a more balanced view?

Or are you saying the phrase mission-critical is a rotten banana and pretty much zero companies are truly mission-critical because businesses can always cut some corners and make do with the cheap plastic toy alternatives?

But then if that’s the case, then there must be degrees of difference within the term’s meaning, and just because you can do without DDOG’s services, say, doesn’t mean you won’t do everything you can to keep it, because it reduces your ROIC by leaps and bounds. So in some sense instead of a binary yes/no, might we not create a scale, say 1 to banana, that signifies just how critical our company’s products are? Allow Monkey to give it a shot based on his own personal stack of 'naners:

DDOG 7.5
ZS 9
SNOW 7
CRWD 9
MDB 6
NET 8
S 8
BILL 6
UPST 2
NVDA 6.5
MELI 7
TTD 5

How fun putting up random numbers in an attempt to feel super smart like y’all!

So: what are some examples of a 10?

Hugs,

Monkey

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None of these can be mission critical or all of them can be mission critical. It depends on how these products are used.
For instance if the MDB is used to store critical patient information that is used while the patient is in the operation room for life saving procedure then yes it is.
The question is can MDB meet the tough criteria of serving mission critical use cases like the one outline above. That I don’t know, but certainly that can affect the market for this product.
So it is all about the use case and does it meet the requirement for that.

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Most companies can still operate without DDOG’s infrastructure monitoring services.


I would alter this slightly to “companies already invested in product (X) consider it to be mission-critical”.

A company heavily invested in ServiceNow considers that critical to their business operations vs a company that isn’t using ServiceNow, etc etc…

Security is like insurance…you don’t necessarily increase business productivity by adding insurance, but I think most would say certain forms of insurance are a must-have.

O365 would be critical. Imagine a F500 company that suddenly can’t send an email, retrieve a file, or conduct any internal or client-facing meetings scheduled because Teams is down, etc…

AWS and Azure and any on-prem IT systems can be critical for that reason. Does DDOG help prevent red flags from turning into shutdowns? I am not an expert here, but believe that is part of the idea.

So they may be borderline, but I would probably says their definition as mission-critical scales with each client’s usage of their product(s).

It isn’t black and white.

Dreamer

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Monkey,
You ask what are in the mission critical (MC) “10” category. I fear this strays far off-topic. I have been quite diligent in avoiding OT posts, but I’ll make a brief exception in this case.

I’ll start by saying I don’t think many of the companies we favor are MC before they get embedded in operations. Once they are, it may be a different story. Take SNOW for example. Most mid to large size companies are quite dependent on some form of analytical reporting. In today’s world that means Teradata or even various BI tools running against some R-DBMS (mostly Oracle or SQL-Server). Not long ago, Slootman said that SNOW has about 3% Teradata migrations. You could hardly call SNOW a MC application. But the more important point is that Teradata has 0% SNOW migrations. It’s a one way street.

Take MDB as another example. In and of itself, no, it is not MC, but once an application is built on top of it, the story might change. The same could be said for NET. What I’m getting at is that it depends on how the s/w is deployed. But it is true that some of our companies are higher up on the MC scale than others.

IMO, based on 30 years in IT at The Boeing Company, the truly MC applications are those that are core to business operations. These would be whatever finance and accounting s/w the company uses. If the company is engaged in manufacturing, then the MRP/ERP software would be included. If the company is engaged in engineering and design, then the CAD software would be included. In most companies the CRM software would be considered MC. HR software would be in this category.

I won’t belabor the point. Digital transformation is really in the very early stages. I don’t have stats, but I think the majority of companies are getting along the old fashioned way. The CEO of BILL asserted that their primary competitor was paper and spreadsheets.

So these high growth companies that are making digital transformation possible are not MC until they are deployed and ingrained in the operations of a company. But once that has taken place, there’s no road back to the previous way of doing business.

The exception, as Beachman pointed out is cyber-security. It’s like insurance. The best case scenario is that it never gets used. But you can’t responsibly run a business without it. Does that make CRWD, ZS, S MC software? As specific solutions, probably not, as members of a category, yes, they are MC.

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Dont we have an example of this for DDOG, Fiscal 2020 Q2 & Q3? Back then most will remember that DDOG’s customers were feeling the pressures of the beginning of the pandemic. I would argue there was a lot more uncertainty back then at the beginning of the pandemic than now…? The rev took a little hit for a quarter or 2 and then sequentially it went back to normal in Q4 2020. Back then we had the work from home movement and I don’t recall DDOG being much of a beneficiary. If thats true DDOG was not mission critical like other work from home stocks at the time. But DDOG kept on ticking to a terrible 50% annualized rate at it’s worst.

Chris

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So: what are some examples of a 10?

Well this is where it gets a bit counter-intuitive. The classic example of a 10 is SAP. Or Epic, for hospitals. Or dispatch systems for transportation systems. Or core banking systems for banking.

These are all things that are either custom built, and/or are very boring in terms of technology.

The counter-intuitive part is that mission-critical systems do not grow at the speeds that we want to invest in. If your business is buying a new mission critical system, you do not really care about innovation. Innovation is your enemy to some extent. If you are basing the very fundamentals of your business on software the most important thing is that it never changes and innovation=change. You want to buy from a boring company that’s been around 50 years. You want a contractual commitment for long-term support. You want to spend years debating and designing your business processes around that system.

So, the rapid growth is in non-mission critical systems. It’s where people experiment and innovate.

–CH

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We must be very careful with our wording here. DDOG’s revenue did NOT take a hit. Their GROWTH RATE took a hit. The COVID quarter had annualized QoQ growth of “ONLY” 30%. ALL THE REST were still above 50%. I think this is what cwg75 meant; that revenue growth slowed.

As others have said, once on these specific SaaS platforms, they become mission critical. Lets dig a bit deeper into MISSION CRITICAL.

The most valuable resources a company today has is its people and its DATA. Whether they admit it or not, every single company is a DATA company.

If anyone disagrees that DATA at its heart is not MISSION CRITICAL, please enlighten me as to why I’m wrong.

So if DATA is mission critical, the software that stores that data must be mission critical. This is where $MDB & $SNOW among other databases live. Is a company going to TURN OFF its database?

FF, $SNOW is more of an analytical database.
Yes, the data in $SNOW is likely also stored in its main source database (MDB, SQL Server, Oracle etc).
Is getting detailed insight into the data to help leaders make the proper decisions about pretty much every aspect of the company considered Mission Critical? I think yes. This analytical capability gives companies that use it a competitive edge.

What about moving data to a different database platform that may be cheaper? This is a HUUUUUUGE endeavor and also very risky. These are major projects. Oracle is one of the biggest and is also almost universally HATED by their customers. They are hated because of the price gouging and such. I’ve seen it SOOOOOOOO many times that a company running Oracle wants to move away, BUT they’re afraid of losing the Oracle “discount” during the moving process as well as the big risk of things not working right or needing to modify other code. I was working with a HUUUUUUUGE defense company for a bit that wanted to move this direction… Despite the HUUUUUUUUUGE amounts of cash they’d save when getting moved, the opted not to attempt it and will just continue to pay.

Ok ok, so if the databases are MISSION CRITICAL, what about DDOG?
Have you ever seen the “lost sales” data from a company when an application is down? Lets take I dunno, a logistics company. This company has a database system where orders go in and by that, those working the floor and the autobots grabing inventory from the warehouses pick the product so that it can all be packaged and shipped. If the DATABASE is unavailable for any period of time, the picking machines and the people packing the boxes will be standing around. Every MINUTE is critical and results in LOST sales. DDOG helps to detect outages or even THREATS of a possible outage. This is MISSION CRITICAL.

Well, what about a mom & pop restaurant, I don’t have servers. How would you feel if your POS system was down and the reason it was down is because the SaaS vendor you pay (TOST?) had booted DDOG because they were cutting costs? Well, many of these customers would go find a new vendor.

DDOG’s risk is if a company decides to use a different monitoring software. That’s a whole other can of worms and as we see, churn is very low. It is easier to replace than the database platform, but then your staff is unfamiliar and there is the inherent risk that something was missed; some distrust until its confirmed to be just as effective.

SECURITY? Well, I think this one is the most obvious to most people. Attacks have been increasing at an alarming rate!! If your company gets hacked, you either have to pay a HUUUUUGE ransom or risk a HUUUUUUUGE prolonged effort to recover and lose data. Most companies will pay the ransom. It can be very very costly. Once again, once a company is on the platform; ZS, CRWD etc… its MISSION CRITICAL. They are not going to save a few bucks by removing the security stuff. Maybe they could replace CRWD with S as that’s not as big a deal but replacing ZS with something else is a very difficult task.

What is NOT mission critical? Slack. One of my larger clients, a big multi-national corporation, announced today they are going to get rid of Slack. Why? Well, they use Outlook for mail and thru their license with Microsoft, Teams is FREE. Many unhappy IT folk there but they’ll all live with it.

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Conehead wrote:
"Well this is where it gets a bit counter-intuitive. The classic example of a 10 is SAP. Or Epic, for hospitals. Or dispatch systems for transportation systems. Or core banking systems for banking.

These are all things that are either custom built, and/or are very boring in terms of technology.

The counter-intuitive part is that mission-critical systems do not grow at the speeds that we want to invest in. If your business is buying a new mission critical system, you do not really care about innovation. Innovation is your enemy to some extent. If you are basing the very fundamentals of your business on software the most important thing is that it never changes and innovation=change. You want to buy from a boring company that’s been around 50 years. You want a contractual commitment for long-term support. You want to spend years debating and designing your business processes around that system.

So, the rapid growth is in non-mission critical systems. It’s where people experiment and innovate."

Conehead is smoking the good stuff! I could not agree more.

Some of the other responses included examples of where a SaaS technology (DDOG, MDB etc) is already being used in-house for an existing business process. Sure those could be mission critical if they are supporting majority of the MAIN business transactions for that company. If those core systems fail, the business could come to a stand still or slow down.

Imagine a company that is experiencing lower revenue growth. The stock price is under pressure and budgets are being cut. The CIO meets with the CFO to go over the spending priorities for the next year. Likely the CIO gets money to keep the lights on (KTLO), cybersecurity and 1-2 other strategic projects. If layoffs are happening, then projects are being shut down. Tough decisions have to be made, priorities have to re-aligned.

Any SaaS sales team will find it difficult to crack this situation to score a new deal or expand existing ARR/RPO.

Here is the bottomline…

Current growth estimates and macro impacts are priced into our favorite tech stocks. For these stock prices to rise, they need to demonstrate that they are growing faster than what Wall Street thinks of their trajectory.

This means…more upselling, more cross selling, more DBNRR, more new customers. It is going to be much harder to convince the CIO above who then has to get the CFO onboard that they should buy that fancy new shiny SaaS “toy”.

Beachman (@Iwannabeontheb2)

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