Mad Hedge Technology Letter
September 8, 2021
Fiat Lux
Featured Trade:
(THE GLUE OF SILICON VALLEY)
(DDOG)
Posts
Datadog's (DDOG) platform enables IT professionals to simultaneously monitor the performance of multiple servers, databases, cloud services, applications, and mobile apps through unified dashboards.
That unified view makes it easier to diagnose problems while saving time and money.
What do these tools specifically do?
They monitor and offer analytics for information technology (IT) and DevOps teams that can be used to determine performance metrics as well as event monitoring for infrastructure and cloud services.
Every CEO I talk to tells me that the accuracy and fluidity of their data procurement is one thing they prioritize above other sets of challenges in technology.
Muddying and underutilizing these tools is really a death knell for any executive in Silicon Valley, and buying the best tools money makes is where Datadog comes into play.
The user interface includes customizable dashboards which can show graphs composed of multiple data sources in real-time. Datadog can also send users notifications of performance issues on any set metric, such as compute rates.
Some of its other features providing immense value are shooting out alerts based on critical issues, broad support for over 250 product integrations, and automatization of collecting and analyzing logs as well as latency and error rates.
Simply put on the financial side of the numbers, Datadog is in the sweet spot of growth, and their last Q2 earnings report validated that.
The quarter was stronger than expected with existing customers, as well as strong new customer sales.
Relative strength revealed itself across product lines and across customer segments.
For a quick review of the quarter, revenue was $234 million, an increase of 67% year over year and 18% quarter over quarter and above the high end of management’s guidance range.
Customers continue to pursue cloud migrations which is a global business trend.
Expansion with existing customers means rapidly standardizing with Datadog to consolidate observability tool vendors.
The stickiness of Datadog’s business is quickly becoming an x-factor with 75% of customers using two or more products, up from 68% a year ago.
Additionally, 28% of customers are now using four or more products, which is up from 15% last year.
These companies rely on Datadog log management as the platform across the organization to find the root cause of issues.
Significant increase in usage of existing products was used to better understand good performance in production.
Datadog has also upsold several massive European e-commerce companies that were using multiple commercial observability tools, and one of their 2021 strategic initiatives was to consolidate and reduce costs by standardizing Datadog to satisfy while improving their team's collaboration and communication.
The company is investing as aggressively as it can to stay ahead of the game.
Accelerating the investment in R&D is helped partly through a few acquisitions to take advantage of the opportunity across observability and security.
Another sub-sector screaming for Datadog penetration is real-time business intelligence (BI), and that will be the next sphere to be attacked by creating products that can easily integrate into their platform.
In terms of the impact on the go-to-market, management is now inclined to push the sell side of the security products more aggressively.
It hasn't happened yet, and they simply weren’t doing enough before.
Those products are just barely reaching the addressable audience it needs to, but it's something that is in the short-term pipeline.
In the long-term, they are making progress in breaking down silos between DevOps and security teams.
This foray will provide opportunities to democratize data and help customers increase visibility and manage complexity.
The world is transforming digitally so the overall market and the size of the infrastructure that will have to be monitored is likely a lot bigger than what had to be monitored five years ago.
There is just a lot more ground to cover in terms of those market penetration. So, how much can Datadog cover with infrastructure monitoring?
That’s really the main crux of piling resources into new acquisitions and the creation of new products.
In parallel to that, it's a field that is still evolving, right?
The name of the game in the cloud is that there are ways to innovate and new ways of running workloads.
Datadog has already seen that story play out multiple times and they continue to improve on their iterations with each version.
Remaining performance obligations, or RPO, was $583 million, up 103% year over year, driven by strong sales activity and increased contract duration.
A company's Remaining Performance Obligation (RPO) represents the total future performance obligations arising from contractual relationships. More specifically, RPO is the sum of the invoiced amount and the future amounts not yet invoiced for a contract with a customer.
The increase in contract duration was driven by a higher mix of annual and multi-year commitments relative to the year-ago quarter. As a reminder, multiyear commitments are billed annually, and they do not incentivize our sales force toward multiyear deals.
In terms of product resiliency and stickiness — it’s there for Datadog based on the numbers I just trotted out.
The projected third quarter still signals elevated growth — forecasting revenues of 60% year-over-year growth at the midpoint.
Essentially, the company's landscape hasn't changed, and the focus is still mostly greenfield, new environments, teams that are going to start small with DDOG and are going to grow until they standardize with them for just about everything they do.
Datadog calls this their "land and expand" model — wherein it locks in a customer with a single product to cross-sell additional ones.
The issue I have with Datadog is not the spectacular structural tailwinds and accelerating growth metrics of the company, but the pricey valuation of the stock.
Don’t get me wrong, I would love to own this company myself, it really is the glue that holds the data together for many big corporations, an important cog in the wheel, and a service that cannot be shortchanged for a tech CEO.
But I would be doing a disservice to my readers to recommend deploying capital at these prices — the stock is up over 400% in the past 2 years which is why the stock is expensive today especially for a company that is a net-loss maker.
However, this does mean the stock can’t grind up higher, but I believe the more advantageous risk-reward scenario would be to wait for a big sell-off in DDOG if searching for a meaningful profit or finding other opportunities until this one becomes cheaper.
If it simply runs away from us, we will just migrate to the next tech opportunity.
Mad Hedge Technology Letter
October 12, 2020
Fiat Lux
Featured Trade:
(DATA ANALYTICS IS THE WAY FORWARD FOR ANY BUSINESS)
(DDOG)
As the coronavirus shows no signs of stopping in the short-term, it only delays the economic recovery that was first labeled as a “V-shaped” recession.
I do believe the negative economic news is being understated when the broader global picture is being looked at.
The sad fact is that emerging countries have taken the harder hit to relative GDP than the US and the US has financial levels in dollar-denominated debt that other countries don’t have access to.
While this macro uncertainty remains in the near term, it only gives more proof that investors need to be digital-first and agile and confirms the cloud as the best path to achieve these results over the long term.
The evidence of this transformation is growing with the overall demand in the form of new customers and new use cases existing customers.
Data analytics will facilitate this renaissance towards digital offerings and that is why, for the first time, I am recommending Datadog (DDOG) — a monitoring service for cloud-scale applications, providing monitoring of servers, databases, tools, and services, through a SaaS-based data analytics platform.
Why are they a great tech firm to buy and hold in?
Their 2nd quarter performance was nothing short of breathtaking.
Revenue was $140 million, an increase of 68% year-over-year and they ended the quarter with 1,015 customers with new client accounts of $100,000 or more — an increase of 71% from last year.
As of the end of Q2, 68% of customers are using two or more products, which is up 40% a year ago.
Can you believe that it’s going so well now that 15% of Datadog’s customers are now using four or more products?
That figure is up from 0% the year before.
The support of cloud and other ephemeral architectures is more important than ever as the rapid change from work-from-home has demonstrated the limitation of legacy infrastructure.
Recent macro events like the pandemic that have accelerated the pivot to digital will unequivocally accelerate the migration to the cloud as the economy improves.
How does Datadog become one of the outsized winners?
They offer a broader solution with end-to-end visibility from back-end infrastructure all the way through to the end-user experience and now security as well. And they win because they offer a truly integrated platform for a single paid view into the IT stack.
Analyzing the management, execution was strong, being able to uphold accounts with larger customers who already have sizable cloud environments. Given macro uncertainty, these customers look to conserve cash while they still could and therefore optimize the consumption of cloud infrastructure and those management relationships are critical to preserving client accounts in major players.
Lower quality customers with large cloud deals from AWS, Azure, or Google Cloud look for immediate short-term savings and focus less on Datadog’s management and client relationships.
These quality customers will lead to a high rate of upselling into more robust packages as the broader economy strengthens.
Customers have been highly receptive of the single platform deliverability from Datadog — the customer has been able to move from multiple disparate monitoring tools to using a single platform for all three pillars of observability.
This allowed them to refocus engineering teams on building new features, and not out of the realm of possibility to expect more than 15% in savings from consolidating disparate monitoring and logging vendors into Datadog.
Another example of a recent deal is with a large entertainment platform that continued to upgrade its Datadog packages and now pledge to commit to over $10 million in the year.
This company has decided to increase investment in observability and broader use of Datadog both with new products and by scaling up on existing products.
So now they can use Datadog to quickly drill down into any failed request and easily identify layers. This company is now using all three pillars, including Synthetics, RUM, and NPM, and has standardized monitoring on Datadog.
The pathway to profits in 2020 is now to be a digital-first business, and the cloud is the best path to achieve this outcome.
Datadog will be the primary beneficiary of this trend and remains very well-positioned to win in the market.
In the near term, the macro environment is likely to continue to cause uncertainty, but in relative terms, Datadog will have no problem in scoring new deals as the volume of companies becoming digital will not cease.
Sustaining strong growth both in the near term and over time is something of a safe bet for Datadog and growing from $100 million of annual revenue in 2017 to $200 million in total revenue in 2018, and $362 million in annual revenue in 2019 is hard evidence the parabolic trajectory will continue uninterrupted for the foreseeable future.
I am bullish Datadog and not surprised that shares of the stock are up over 300% in 2020. This is just the beginning of share appreciation.
