Datadog: Keep An Eye On The Drop, But No Need To Rush In

seekingalpha2021-04-19

Summary Shares of Datadog have lost ~25% from their all-time highs on valuation concerns so far this year. Though Datadog continues to be one of the fastest-growing and highest-quality software ...

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The company quickly went from being a little-known startup, barely surfacing in the frequently-circulated lists of private \"unicorn\" companies, to being a juggernaut in enterprise technology at one point worth nearly ~$40 billion in market cap. Datadog went public in late 2019 at just $27 per share; today, the company is worth about four times that.\nYet Datadog has encountered its first major slip in its furious rally since the IPO this year. Even though the S&P 500 has hit all-time highs, this year, it's actually the value category that is pumping indices to record highs, while most small/mid-cap growth stocks have pulled back on valuation concerns. As one of the perennially most expensive software stocks in the market, it shouldn't come as any surprise that Datadog shares have technically entered the bear market territory, with its current ~$90 share price down about 25% from all-time highs notched earlier this year.\nData by YCharts\nThe question for investors now is: Is this a \"buy the dip\" moment for Datadog, or should we hold out for another drop? In my view, it's the latter.\nIt's hard to argue that Datadog isn't one of the highest-quality software offerings that money can buy. It is one of the fastest-growing enterprise software companies, with Q4 revenue growth clocking in at 56% y/y. It has a usage-based pricing model that has become even more popular among investors last year than per-seat subscriptions, due to the expansion potential (other examples of usage-based software companies include Twilio (TWLO) and Fastly (FSLY), both also rapid market advancers).\nFrom a technology standpoint, Datadog has other rivals concerned. For investors who are less familiar with Datadog, the company's bread-and-butter lies in app and infrastructure monitoring, which basically surveys a company's systems to determine whether they are performing as expected. Datadog's success with the market (and the widespread recognition that came with being a public company - as many IT buyers are loath to purchase from startups, but have no problems engaging in serious discussions once that company is public) forced New Relic (NEWR), the traditional market incumbent in the monitoring space and a one-time Wall Street favorite, to completely revamp its product stack and change its go-to-market approach. Unsurprisingly,Datadog was named the Leader in the application monitoring space by Gartner, the top tech industry reviewer and analyst. This type of recognition carries significant weight among IT buyers.\nOther tailwinds for Datadog include the fact that in 2021, more and more IT departments will be willing to take on more backend infrastructure projects. 2020 was all about empowering remote work and keeping the lights on; 2021, in my view, will see some much needed housekeeping items attended to. This may help ease sales cycles for Datadog this year.\nBut when we take a step back from all this: to what degree is strength already baked into Datadog's current valuation? At current share prices near $90, Datadog has a huge market cap of $27.69 billion (I can't hesitate but to point out again that only a few years ago, Datadog wasn't even on the unicorn lists), and after we net off the $1.52 billion of cash and $575.9 million of debt on Datadog's most recent balance sheet, its enterprise value is $26.75 billion.\nMeanwhile, for the upcoming fiscal year, Datadog has guided to $825-$835 million in revenue, representing a 37-38% y/y growth range.\nFigure 1. Datadog FY21 outlook\nSource: Datadog Q4 earnings release\nNow, the fact that Datadog can maintain near-40% revenue growth when it is coming up on a ~$1 billion revenue scale is impressive. But at the midpoint of this revenue outlook, Datadog trades at a33.4x EV/FY21 revenue multiple- in other words, a richer multiple of its revenue than the S&P 500 trades as a multiple of earnings. And though Datadog is free cash flow positive, the company has only barely begun to get close to breakeven on a GAAP basis.\nIn my view, the recent correction in Datadog shares was a much-needed reality check, and there could be more air in this balloon that needs to be let out. I'd be more comfortable investing in Datadog at a 24x revenue multiple, or a ~$70 price handle. My recommendation: keep a close eye on Datadog for continued volatility, but don't rush in to buy the dip just yet.\nQ4 download\nThis being said, let's no go through Datadog's fantastic fourth-quarter results in greater detail. The Q4 earnings summary is shown below:\nFigure 2. Datadog Q4 results\nSource: Datadog Q4 earnings release\nDatadog's revenue grew at an incredible 56% y/y pace to $177.5 million, decelerating only slightly from a 61% y/y revenue pace in Q3. The company's revenue handily beat Wall Street's expectations of $163.6 million (+44% y/y) by a hefty twelve-point margin.\nExpansion, especially among Datadog's larger customers, has been a key driver behind its recent growth - especially as increased reliance on technology and the internet amid the pandemic has driven up usage, and thus Datadog's revenue. The count of Datadog customers with an ARR (annualized recurring revenue) above $1 million has increased 94% y/y to 97 total customers.\nDatadog also continues to add modules and capabilities to its already-formidable platform. The company announced a tuck-in acquisition of a company called Sqreen that adds security capabilities to Datadog in the form of in-app web application firewalls (WAF), a perfect security complement to Datadog's monitoring solutions. Management considers security a large, and yet so far untapped, opportunity for Datadog to expand into.\nOlivier Pomel, Datadog's CEO and founder, noted very strong go-to-market performance on the Q4 earnings call as well as the fact that more and more of Datadog's customers are adopting two or more products, boosting overall ARR. Per his prepared remarks:\n\n Execution was very strong with outstanding sales performance, particularly against the macro backdrop. New logo generation was very strong, including a new record of new logo AR added that was significantly above last year’s number. Very strong performance across the board from commercial and enterprise sales channels as well as a record number of $1 million plus new logo customers. Growth of existing customers was robust, as customers of all sizes continued to grow the usage of Datadog through both increased consumption and cross-selling and Q4’s growth of existing customers was broadly in line with pre-COVID trends. Lastly, churn remains very low and consistent with pre-pandemic historical rates.Next, our platform strategy continues to resonate and win in the market. As of the end of Q4, 72% of customers are using two or more products, which is up from 58% last year. Additionally, 22% of customers are using four or more products, which is up from only 10% a year ago, and we have another quarter in which approximately 75% of new logos landed with two or more products.\"\n\nDatadog also reported $219.4 million of billings for the quarter, up 68% y/y on a reported basis and 61% y/y after adjusting for a favorable $6 million compare in last year's compare. The strong billings growth exiting Q4 does suggest that Datadog's guidance of 37-38% y/y overall revenue growth for FY21 may be a few points too light.\nFrom a profitability standpoint, Datadog generated -5% GAAP operating margins (up 3 points year over year), and 10% positive pro forma operating margins, also up 3 points from 7% in 4Q19. Gross margins were flat year-over-year (suggesting that Datadog's gross margin profile has likely peaked already), while the margin gains come from efficiencies on the sales and marketing side (like all software companies, Datadog has benefited from the elimination of travel and entertainment costs in 2020, though we expect this to recur in 2021). The company also generated $83.2 million in free cash flow for the full year FY21 (a 13.8% FCF margin), versus basically breakeven cash flow in the prior year.\nFigure 3. Datadog FCF\nSource: Datadog Q4 earnings release\nKey takeaways\nThere's certainly a lot to like about Datadog fundamentally. Forget the rule of 40: Datadog's 10% pro forma operating margin plus its 56% revenue growth in Q4 puts it in its own stratosphere, the Rule of 60. There is certainly justification for a premium valuation multiple for Datadog, but I'd be comfortable investing in the stock at a >30x forward revenue multiple when the market is so sensitive to valuations. Keep a close eye on this stock and see if it continues falling; if not, remain on the sidelines.","kind":"news","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":373825620,"gmtCreate":1618839914460,"gmtModify":1634290486583,"author":{"id":"3581817420633828","authorId":"3581817420633828","name":"linrui","avatar":"https://static.tigerbbs.com/48b80059ee7e5428aa3ed30a6b83cfcd","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3581817420633828","authorIdStr":"3581817420633828"},"htmlText":"Go","listText":"Go","text":"Go","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/373825620","repostId":1117508383,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":373860288,"gmtCreate":1618839252044,"gmtModify":1634290496500,"author":{"id":"3581837992294791","authorId":"3581837992294791","name":"3d468733","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"3581837992294791","authorIdStr":"3581837992294791"},"htmlText":"..A","listText":"..A","text":"..A","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/373860288","repostId":1117508383,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":373860010,"gmtCreate":1618839230830,"gmtModify":1634290496980,"author":{"id":"3576276306027110","authorId":"3576276306027110","name":"xiaochen10","avatar":"https://static.tigerbbs.com/5b1ab0cdd6be0408a7de20a01c26885a","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3576276306027110","authorIdStr":"3576276306027110"},"htmlText":"go","listText":"go","text":"go","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":1,"commentSize":1,"repostSize":0,"link":"https://laohu8.com/post/373860010","repostId":1117508383,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"comments":[{"id":4079071,"gmtCreate":1618881150664,"gmtModify":1635515871504,"authorId":3564205595315610,"author":{"id":3564205595315610,"idStr":"3564205595315610","authorId":3564205595315610,"name":"Fei2","avatar":"https://static.tigerbbs.com/31547e7cf82c22e0a1fb334986b7ae6f","vip":1,"crmLevel":7,"crmLevelSwitch":0,"individualDisplayBadges":[]},"repliedAuthorId":0,"objectId":373860010,"type":1,"supId":0,"prevId":0,"content":"Oh","text":"Oh","html":"Oh"}],"langContent":"EN"},{"id":373887346,"gmtCreate":1618839193085,"gmtModify":1634290497583,"author":{"id":"3574808590725358","authorId":"3574808590725358","name":"donnie991","avatar":"https://static.tigerbbs.com/2aa0229645cabfe6cf50a23e765c1a12","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3574808590725358","authorIdStr":"3574808590725358"},"htmlText":"Go","listText":"Go","text":"Go","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/373887346","repostId":1117508383,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":373817607,"gmtCreate":1618838687109,"gmtModify":1634290503757,"author":{"id":"3575894200290768","authorId":"3575894200290768","name":"EvonneL","avatar":"https://static.tigerbbs.com/cb53b45bdf200111cb5cfc9e7900c627","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3575894200290768","authorIdStr":"3575894200290768"},"htmlText":"Bbb","listText":"Bbb","text":"Bbb","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://laohu8.com/post/373817607","repostId":1117508383,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":17,"commentSize":5,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":false,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"laohu8","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1117508383"}