DataDog is the monitoring and analytics platform for developers, IT operations teams and business users in the cloud age.
Its SaaS (software as a service) product integrates and automates infrastructure monitoring, application performance monitoring as well as log management services for clients.
DataDog is used by organisations of all sizes and across a wide range of industries to enable
digital transformation and cloud migration, drive collaboration among development, operations and business teams, accelerate time to market for applications,
reduce time to problem resolution, understand user behaviour and track key business metrics.
Basically, in layman terms, it monitors customers’ cloud activity and mines it for business insights to increase business productivity. It is helping companies get smarter and provide cloud monitoring and actionable analytics which enables them to do so.
Furthermore, not only is it a player, DataDog is named as a Leader in 2019 Forrester Wave™ Intelligent Application And Service Monitoring report.
What are the benefits DataDog provides to consumers ?
• Accelerates digital transformation. It enables customers to take full advantage of the cloud to develop and maintain applications in the face of increasing business and time pressure and complexity of underlying infrastructure. As a result, its platform helps accelerate innovation cycles and optimise business performance.
• Reduce time to problem detection and resolution. Using infrastructure, APM and log data in its unified platform, customers are able to quickly isolate the root cause of application issues in one place where they otherwise would be required to spend hours trying to investigate using multiple tools. The reduction in mean time to detection and mean time to resolution helps our customers avoid lost revenues and enhance customer experience.
• Improve agility of development, operations and business teams. DataDog eliminates the historical silos of development and operations teams and provide a platform that enables efficient and agile development through the adoption of DevOps. The platform enables development and operations teams to collaborate closely with a shared understanding of data and analytics. This helps them develop a joint understanding of
application performance and shared insights into the infrastructure supporting the applications.
Why I bought DataDog shares
Without further ado, let me delve into the fundamental analysis that I carried out using my investing framework to justify my purchase of DataDog.
Revenue and Gross Profits is substantially growing year on year
This shows that the company has the proven ability to grow year-on-year. Revenues have grown vs prior year and Gross Profits has grown . However, one should note that the company is still in the red in terms of Net Income as it is spending around 1/3 of its total revenue in research and development.
Their platform consists of seven products that can be used individually or as a unified solution, including:
• Infrastructure Monitoring.
• Application Performance Monitoring (APM).
• Log Management.
• User Experience Monitoring.
• Network Performance Monitoring.
• Security Monitoring.
DataDog’s research and development spend is for the design, development, testing and delivery of new technologies, features and integrations of their platform, as well as the continued improvement and iteration of our existing products.
It is also allows DataDog to operate and scale their platform including the underlying cloud infrastructure. Our research and development investments seek to drive core technology innovation and bring new products to market.
This would allow DataDog to add on to their suite of products to garner competitive advantage for their market offering. Furthermore, it also allows for them to scale as they are able to capture the market from one product and draw them over to another.
DataDog has a competitive profit margin
DataDog has a gross profit margin of 75.48%.
Warren Buffett, the oracle of Omaha, has found that companies that have excellent long term economics working in their favour tend to have consistently higher gross profit margins than those that don’t. What creates a high gross profit margin is the company’s durable competitive advantage, which gives it more wiggle-room to price its products and services.
DataDog has a solid balance sheet
According to DataDog’s 2019 Annual Report, the company has $774m in Cash and Short term Investments and zero short/long term debt. Furthermore, this cash pile more than doubles DataDog’s total liabilities which lie at $256m.
Having a strong balance sheet would allow DataDog to tide past a downturn instead of cracking under excessive debt and going bust when things get bad.
The Company has positive Free Cash Flow
While the FCF from 2019 is not too substantial, I am not too worried as it is sitting on a stock pile of cash, giving it sufficient room to support working capital and capital expenditure in the next 12 months. However, I will continue to monitor the Company’s cash flow in the coming years to further evaluate.
DataDog’s revenues are small compared to the entire IT Operations Management industry
The IT Operations Management market represents a $37 billion opportunity in 2023. That is about a 100 times the company’s current revenue.
The growth in the number of large deals demonstrates that DataDog has done well in its attempts to move upmarket. While DataDog has been known for enabling customers to easily and independently get started using the product, enterprises often require more support, and DataDog indicates that it plans to continue to invest in meeting such demands. (As evident in their R&D spend).
DataDog customers also expand their usage of the product over time. Over the past couple of years,dollar-based net retention rate has been around or slightly under 150%, indicating that customers spend significantly more each year. (I’ll explain more on this below)
Moving on to the qualitative side, DataDog is a founder-led company
CEO Olivier Pomel and CTO Alexis Lê-Quôc were executives on the development and operation teams, respectively, at e-learning company Wireless Generation. They witnessed how internal operational upheaval and discord can hold a company back and decided to set a different tone as they started their own business, which eventually led to the birth of DataDog.
Before Wireless Generation, Olivier held software engineering positions at IBM Research and several internet startups. Meanwhile, Alexis spent several years as a software engineer at IBM Research, Neomeo and Orange.
Here’s a CNBC interview with the CEO as he introduces his company and the market environment:
Leadership with Skin in the Game
Pomel and Lê-Quôc each still owns roughly 6% of the company’s outstanding shares.
Furthermore, it should be noted that both Pomel and Lê-Quôc are awarded Stock options worth $18,125,700 and $10,875,420 respectively. This means that their interest is thoroughly aligned to investors as he would act in the best interests of the company.
DataDog’s business model and economic moat
DataDog’s products offer monthly subscription which in turn churns in a recurring revenue. However, the interesting thing to note is DataDog’s ability to convince existing customers to spend more money on the platform over time.
Datadog’s dollar-based net retention rate is 146%. This means that all of its customers who have been around for at least two years has been generating 46% more revenue over the past fiscal year compared to the previous trailing fiscal year. Datadog’s total customer base in 2019 stood at 10,500, up from 7,700 in 2018 and 5,400 in 2019.
Furthermore, the company has indicated several growth strategies moving forward:
• Expand customer base by acquiring new customers.
• Expand within existing customer base through broader deployments, new use cases and new product adoption.
• Expand technology leadership through continued investment and new products.
• Expand customer base internationally.
By expanding its suite of products, DataDog is not able to unlock more market opportunities as it look towards providing more solutions to a wider range of problems, it also gives its customers more reasons to stay with the company as it is able to enjoy this all in one SaaS.
During the most recent earnings call, the leadership had also announced the development of its security monitoring tool, thereby allowing the platform to include cyber-security under its umbrella of tools.
Risks!
- If DataDog is unable to attract new customers, our business, financial condition and results of operations will be adversely affected. However, this does not look the case as of yet as evident in their proven growing number of customers
- With the advent of data hackers around the globe, if DataDog experiences a security breach or unauthorized parties otherwise obtain access to its customers’ data, its platform may be perceived as not being secure. Their reputation may be harmed, demand for its platform and products may be reduced, and DataDog may incur significant liabilities in terms of lawsuits.
- DataDog is still in the red. DataDog generated net losses of $(16.7) million, $(10.8) million and $(2.6) million for the years ended December 31, 2019, 2018 and 2017, respectively. However, most IT companies believe in the spend big to grow big philosophy and DataDog is no exception. I believe that the company can choose to be profitable but prefers to instead look towards growing the company and its suite of products to widen its economic moat and gain a competitive advantage first.
Disclaimer: Any information provided on this document is meant purely for informational and investor educational purposes and should not be relied upon as financial advice. No information is presented with the intention to induce any reader to buy, sell, or hold a particular investment product or class of investment products.
SG Money Bunny 