Using my Anti-fragile framework, I wanted to show how DataDog Energy stacks up.
“To bring sanity to IT Management”
I really love this mission statement. The co-founders – Olivier Pomel and Alexis Le-Quoc – worked at Wireless Generation – a company focused on helping K-12 teachers. One worked on Developments (building things) and one worked in Operations (making sure the things that have been built actually work).
Think of this as the construction crew and the maintenance crew for a large subway system. It’s vital these two groups talk to each other. But as the cloud is brand new, people are waiting for some issues of standardization and vocabulary to settle in. That’s why DDOG’s mission is so perfect – it is providing that solution.
High Switching Costs: Datadog has four broad subscription offerings:
Infrastructure: Again, using the subway analogy, this is where you make sure things aren’t falling apart and are going where they need to be. Clients pay $0-$23 per host per month for monitoring, dashboards, integrations, and alerts.
Application Performance Managmeent (APM): Are the trains arriving on-time and travelling at safe speeds. Only, this measures apps, not trains.
Log Management: Look through all the data about when trains arrive and see what lessons can be learned. This is one area where AI and ML take over. Companies can by for 30-day retention of logs for learning.
Synthetics: This is simply the ability to see what it’s like to be a customer of your service. For the subway, it means literally riding the subway. For tech companies, it means running simulations to get an idea for the user experience.
I explain all four because many start off with just one or two, but add more over time. Dollar-based net retention is 146%. This means customers are not only sticking with DDOG, but adding more of these solutions over time.
Network Effects: The company relies on AI and ML to power its tools. As customer growth has been off the charts, this is very strong. Additionally, the team at DDOG has built a lot of its tools by observing where clients have unnecessary friction. As one of the few fully funcitoning all-in-one suites, this additional data makes the service more valuable by offering up more insights that other companies don’t have.
Here’s where I see things getting very interesting. DataDog started with just Infrastructure, and has moved onto its four key offerings. If you think it will stand pat with that, you’re crazy.
Right now, it has over 350 integrations. So if you’re using PagerDuty, for instance, it can integrate its data into DataDog. I wouldn’t be surprised, however, to see DataDog move into other areas it’s not currently covering over time. It has access to all this data, and if it can offer companies the same service under one umbrella, why wouldn’t it.
In some ways, DataDog’s all-in-one mode makes it somewhat like Amazon. Vendors go to AMZN because of the number of clients they are exposed to. But Amazon can undercut them by taking data on sales and developing their own product. DataDog can do the same. Other SaaS need to offer integrations with DDOG’s growing client list. But the very inclusion of that integration also makes them vulnerable to DDOG.
Skin in the game
Role of founder: Aforementioned co-founders are CEO and CTO, respectively.
Insider Holdings Insiders combined own 29.7% of shares outstanding
Glassdoor: The company has a 3.8 star rating (out of 5) with Pomel having an 85% approval rating
Cash: $664 million
Free Cash Flow: ($13 million)
I’m not taking a point away here. Why? Because the company has already proven it can be FCF positive (generated $6M in 2017) and it has no long-term debt. I believe it some type of crisis hit, it could actually take advantage of the situation.
Total Score: 10.5 points
This is a very good score. I’m not too concerned about valuation at this point, as I’ll likely be buying a small tranche of shares and adding more over time.
In the end, the optionality of adding more services and using data collected via integrations is very interesting to me. Obviously, with dollar-retention rates like this, there’s a lot going right here. It’ll be interesting to see how the now-very-crowded SaaS field consolidates under fewer umbrellas. I think DDOG could be one of those umbrellas.
See all my holdings here: http://my.fool.com/profile/TMFCheesehead/info.aspx
What is Antifragile framework and how has it performed?
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