Examples of Getting it Wrong & DDOG vs DT

Investment Analysis Clubs Saul’s Investing Discussions
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As I read this article I realized it was an excellent example of the sort of language and nuance I was missing just a couple of months ago.
https://www.fool.com/investing/2020/07/31/this-datadog-compe…

The first part of the article about Datadog (DDOG) is good, then it is like a different author took it from there for a bit and then handed it back over.

“Investors looking for other options in the sector may want to consider one of Datadog’s peers, Dynatrace (NYSE:DT), a cloud-based software intelligence provider, whose performance has nearly matched Datadog since that company’s IPO last year.”

“Performance” in this case means “stock price” and not about how the company has performed, which becomes apparent next…

“Dynatrace isn’t growing as fast as Datadog, but brings in more revenue, is solidly profitable, and is trading at a more reasonable price-to-sales ratio of less than 20 based on guidance for the year. It also has a forward P/E ratio of around 80.”

Where to start. These are all essentially stated with no context…

  • “Not growing as fast but brings in more revenue”? So? Google also brings in more revenue. No point being made here. By the way, further down revenue growth is stated at ~30%…and raised it guidance for the year to 20%

  • “solidly profitable”? Bank of America is solidly profitable (I assume) but has underperformed the market by almost 30% over the last 5 years.

  • Price-to-sales “more reasonable” than what? It probably deserves to be this low. The author is comparing the two raw numbers without taking their growth (or anything else) in to account. I am learning to start with the assumption there is a reason for the difference in the numbers (start skeptical, not greedy).

  • Price to earnings ratio (P/E) is just not a metic that matters here (nor is it particularly good, at 80, if this were a traditional business model).

…maybe I’m being too hard on the article. At the bottom we start to get some numbers more familiar:

“With solid revenue growth, a net expansion rate around 120%, a wide profit margin, gross margin at 85%, and an expected free cash flow margin around 30% this year, it’s hard to find fault with Dynatrace. For investors looking for a reliable cloud stock with long-term growth potential, the software intelligence specialist looks like a good bet.”

Not bad!! That NER is formidable and the GM is great! If they weren’t growing at 1/3 the rate of Datadog, and guiding downward, we might be talking more about this one. I can even give them a pass for calling 30% revenue growth “solid” (if it wasn’t going down). It really is pretty good (if it wasn’t going down), just not by comparison.

Comparison (I calculated the PS myself from the last reported Qs):


        Growth    GM     Rev(TTM)   PS
DT       30%      85%    528M       22
DDOG     87%      80%    423M       73

It won’t be long until DDOG has a similar PS (or higher price) with growth 3x faster! I bet they’ll get that extra 5% from operating leverage as they do it too. DT is about to get passed like it is standing still.

One question I could use some help thinking through: If price appreciation is similar, and DDOG is growing 3x faster, how is it that the PS is higher for DDOG? Shouldn’t the growth of sales cause the PS to contract more for DDOG as both companies experienced the same stock price increase over the last year? (actually DDOG is 30% higher on their graph). I’m sure I’m just not looking at it from the right perspective but I want this sort of thing to be intuitive. Is it as simple as they didn’t start at the same place and it went proportionally from there?

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One question I could use some help thinking through: If price appreciation is similar, and DDOG is growing 3x faster, how is it that the PS is higher for DDOG? Shouldn’t the growth of sales cause the PS to contract more for DDOG as both companies experienced the same stock price increase over the last year?

Rafe, you are misunderstanding what P/S means. It’s price per share divided by revenue per share (like a PE ratio, but for revenue). DDOG’s P/S ratio is way up because people bid the share price up, and it is BECAUSE of the rapid growth. All our companies have high P/S ratios for that same reason. Dull companies have low P/S ratios. Dynatrace is a dull company with a low P/S ratio.

Hope that helps

Saul

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Hi Saul,

“…DDOG’s P/S ratio is way up because people bid the share price up…”

That is the point of my question. The article points out both prices were bid up roughly equally.

“Rafe, you are misunderstanding what P/S means…”

That was my assumption, and why I asked. This is new to me and if you recall I learned a lot doing this with Zoom not too long ago to project their numbers to the end of the year. The equation I’m using here is (with shares and revenue numbers from reports this time!):

shares * price / Revenue TTM

If the following is correct, my understanding was right. It was my assumptions that were not right. In other words, the discrepancy I noticed is caused by one of the inputs for the math, but not the price or revenue…which left the share count!

I noticed the data I have went to Jun for DT but only Mar for DDOG (because they didn’t report yet). Here are all the numbers and a re-calc.


              Year-Ago                           Today***
     Price  shares(M)  Rev(M)  PS  |  Price  shares(M)  Rev(M)  PS
DT    $23     237       455    12  |  $42      284      578     21
DDOG  $43     80(!)*    266    13  |  $94      328**    499     **62 (dropped ~10!)**

*Crazy dilution to get to 328 a year-ish later!

**Assumed to be the same as last Q

***DDOG Rev Est:

Mar-31-20	Dec-31-19	Sep-30-19	Jun-30-19	
  131.2	          113.6	          95.9	           83.2	
   87.4%           84.5%	  87.7%  	   82.2%

**Guess at Jun'20:** 83.2 * 90% growth = **158.1**

I think I found the answer and it isn’t what I expected at all. It is the dilution. If I take the same numbers above for “Today”, but use the share count from a year ago, the PS for DDOG drops to just 15! There is the better PS I was expecting!

If this is all correct, how worried are we by this pattern? Here are the last 8 quarters of shares outstanding (diluted), which is what I used above:


Mar-31-20  328
Dec-31-19  270
Sep-30-19  104
Jun-30-19   80
Mar-31-19   77
Dec-31-18   71
Sep-30-18   73
Jun-30-18   67
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One question I could use some help thinking through: If price appreciation is similar, and DDOG is growing 3x faster, how is it that the PS is higher for DDOG? Shouldn’t the growth of sales cause the PS to contract more for DDOG as both companies experienced the same stock price increase over the last year? (actually DDOG is 30% higher on their graph). I’m sure I’m just not looking at it from the right perspective but I want this sort of thing to be intuitive. Is it as simple as they didn’t start at the same place and it went proportionally from there?

Rafe- Fromthe TMF chart it appears that the price of DDOG has increased more than that of DT. Also they may have begun the year with a disparity of PS. One can’t tell from the TMF article.

Some additional info. DT reported a 42% increase in ARR and a RPO of $495M up 56%. FCF was at $63.3M
all good numbers. Also operating margin was up 24%. The data convinced me to take a position but I reversed myself when I focused on the trendline.

Your main point though is key and valid. Everyone wants to grind an axe. It helps to go to the source.

cheers

draj

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Rafe, if the number of shares goes from 80 million at the end of June to 270 million at the end of December, that just shouts at you that they IPOed in there, In fact they did IPO on Sept 19 of that year.

If you are curious about why Sept didn’t show the 270 million it’s because the shares for the quarter are the average for all the days in the quarter, and with the IPO on the 19th, that means there were only 10 or 11 days out of 92 days in the Sept quarter that were at the higher level.

Hope this helps.

Saul

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WOW that helps a LOT! I didn’t realize the IPO data was in there. I didn’t look at the name of the forms the data came from!

OT: Source of data
This site is really great. You have to make a login to see this but it is free. This is the Datadog Income statement. If not already set, view quarterly and you’ll see a standardized results with growth % right in-line. Or you can click “As Reported” and see the data taken from the filings:
http://www.rocketfinancial.com/Financials.aspx?fID=240907&am…
They not only have all this data but there are links to the original filings and such.
I checked a bunch of numbers against the filings early on and it was all accurate (even where Yahoo and Google were not accurate).

So, here is something I didn’t wake up this morning expecting to learn: FORM S-1 is (according to Google) “a form that private companies file with the U.S. Securities and Exchange Commission (SEC) when they intend to go public. The form includes a wealth of information about the company”

You are absolutely right Saul.

  • June 30th, 2019 was the final S-1 filing.
  • September 30th, 2019 was the first 10Q quarterly filing and it showed 103.9M shares.
  • 3 months later they filed a 10-K that shows 270.1M, which I assume is also partial as this is an annual filing but only had 6 months as a public company
  • So the most recent 10-Q, in March 31st, 2020, was the first full-period filing and it shows 327M shares (diluted)

I don’t know if there was still some dilution but I don’t care to be exact here, so just assuming no dilution since IPO (and noting the price is only from 10 1/2 months ago for DDOG) the numbers change to this:


              Year-Ago                           Today***
     Price  shares(M)  Rev(M)  PS  |  Price  shares(M)  Rev(M)  PS
DT    $23     237       455    13  |  $42      284      578     22
DDOG  $36     *328*       266    **44**  |  $94      *328      499*     **62**

*^Italics are estimates*

That makes a lot more sense! It did indeed start much higher and stayed that way. I don’t know if I can do this simple comparison, but DT’s PS went up by 70% while DDOG’s only went up about 40% while its price went up even more as a percentage in the price comparison ~110% vs ~140%!

THE POINT (lesson for me) is that hyper-growth overcomes valuation concerns. These two scenarios are basically the same level of “expensive” in my mind now, all things being equal but price and growth rate:

A) An “over-priced” company that is growing so fast it will only take a couple of quarters to either become “cheap” or provide significant price appreciation

  • VS -

B) A moderately “over-priced” company that is growing more slowly and so will take just as long to grow in to a similar valuation.

The numbers DO show this. DDOG is growing way faster so the PS (which is just a cherry-picked thumbnail valuation comparison shortcut) is actually dropping faster than DT’s while the returns for us investors are better.

This is why people miss out because something looks expensive. Context is everything!

P.S. It is uncomfortable putting posts like this out in the public, especially considering I am not in financing or business administration. I’m learning by doing…a DIY investor. Thank you all for replies and corrections (not just in this thread either!). After nearly 15 years around the fool I feel like I’ve learned more in the last 3 months here than in all that time. That probably isn’t fair, it is probably more like 5% more, but a very important 5%!

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Also, many companies have convertibles and preferreds sitting on the equity table…that dont show up on the common share count base unless you look deeper…

In most cases, most of those get converted into common shares with IPO… so that is not a dilution, it is just conversion…
Only dilution at IPO is additional shares sold at IPO by the company…

If you go back and look at S-1 document, they would spell out all of these… and also for a couple of quarters after IPO in SEC filing.

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One question I could use some help thinking through: If price appreciation is similar, and DDOG is growing 3x faster, how is it that the PS is higher for DDOG? Shouldn’t the growth of sales cause the PS to contract more for DDOG as both companies experienced the same stock price increase over the last year? (actually DDOG is 30% higher on their graph). I’m sure I’m just not looking at it from the right perspective but I want this sort of thing to be intuitive. Is it as simple as they didn’t start at the same place and it went proportionally from there?

Rafe, all you would have to do is look at the P/S ratio that Dynatrace had when it went public and I’m sure you will find that it’s P/S ratio has expanded over that time.

I actually just looked at this the other day. DDOG went public at 42x trailing sales. They report earnings on 8/6, at which point, their trailing P/S ratio should contract about 15% to about 52x trailing revenues. So that’s only about 20% increase in price multiples since DDOG went public. The vast majority of DDOG’s performance since it went public in the mid 30s was due to their higher revenue levels compared to just a year ago.

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