Top Stock - Datadog
SCALE 89 Top Stock Pick
Hey👋, I’m James and welcome to the free version of SCALE 89. My goal is to help my readers understand technology, software, and high growth investing. I’m sharing my ideas, insights and perspective on Tech so readers all over can learn from my 9 years of experience. Thank you for reading and supporting SCALE 89.
Top Stock Pick - Datadog
Datadog is a market leading software company based in NYC with over 3,200 employees. Datadog software helps companies monitor their cloud based applications by collecting data from servers, databases, and other third-party services. The core idea is to make the data more observable by putting it all in one easy to use place versus observing data from each individual service. Datadog software is considered market leading and has achieved the leading position in the 2021 Gartner Magic Quadrant for Application Performance Monitoring.
Datadog is a software tool for managing cloud based applications and their products are still in hyper-growth mode. This is because of the rapid growth and transition to software overall in the market. As companies use more software tools, they are going to need better observability and monitoring tools. Software developers and DevOps employees are monitoring 40 plus applications for many companies. In some cases, they might be managing over 100 different software tools and apps. This ongoing digital transformation leads to more data, reports, and alerts which means more of a need for tools like Datadog.
Datadog now makes over 10 software products related to Infrastructure monitoring, Network device monitoring, Log management, Audit trail, Database monitoring, Application security monitoring, Alerts, and Incident management. These products help companies manage and monitor their most critical cloud and software tools.
Strong Financial Performance
Datadog has shown exceptional growth and financial performance for over 5 years. This shows they hire top talent, deliver new products to customers, and grow their business by selling more software each year. They operate a land and expand sales model with 81% of customers using 2 or more products. This means they bring in new customers with 1 or 2 products but are able to sell them other software products over time and at their renewal.
Recent Quarter 1 of 2022: Revenue was $363 million, an increase of 83% year-over-year.
Average Compound Annual Growth Rate (CAGR) of 74% since Fiscal Year 2017.
130% + dollar-based net revenue retention rate for 19 consecutive quarters. This means their sales team is able to sell customers other products very well.
Around 2,250 customers spending $100K + per year in software as of March 31, 2022, an increase of 60% year-over-year.
Around 19,800 total customers
81% of customers are using 2 or more products
35% of customers are using 4 or more products
Revenue Growth and Acceleration
The image below shows the growth at Datadog over the last 5 fiscal years. Compound Annual Growth Rate or CAGR is the average revenue growth rate over the years and Datadog has had an average rate of 74%. This is considered hyper-growth because it is consistently above 40% each year. Let’s compare the growth at Datadog to Microsoft which had a CAGR of 13.08% during the same 5 year period. This means Datadog is still in a rapid growth mode and they are growing revenue at very high rates each year. They are growing much faster than the larger Tech companies which tend to have much slower growth.
Datadog has also had an acceleration of revenue growth in recent years. In the fiscal year 2019, they did $363 million in revenue and that grew 66% to $604 million in 2020. But from fiscal year 2020 to 2021, they grew revenue at 70% which shows the acceleration of growth. This is rare and unusual for a company their size but it shows how valuable their software is. This means more companies are buying Datadog software and the current customers are spending more each year on the new products. This is a key reason that Datadog is a top pick in SCALE 89.
Datadog has shown consistent revenue growth over the last 5 years with a very high compound annual growth rate over 70% on average.
Quote from the CEO of Datadog
"We are pleased with our strong first quarter results, with 83% year-over-year revenue growth and strong profitability. We continue to see customers of all sizes and in all industries progressing along their digital transformation and cloud migration journeys. Companies are increasingly relying on software and cloud services to drive revenue, competitive advantage, and positive business outcomes. By using our unified, cloud-native, end-to-end observability and security platform, our customers can understand, manage, and drive value from their exponentially growing and ephemeral cloud environments." — Olivier Pomel, co-founder and CEO of Datadog
Since the Datadog IPO in September 2019, the Datadog stock has delivered a 162% return to investors. Prior to the most recent crash which started in mid-November of 2021, Datadog stock had done a 433% return to investors. This is exceptional performance during such a short time period. Datadog stock is outperforming larger Tech companies, ETFs, and most funds. The recent crash is tough to see, but it is important to remember that it is temporary. The larger Tech trends like digital transformation, cloud services, cyber security, and more data consumption will all contribute to future success of Datadog and their many new products. If you have a longer term investing timeframe, I am very confident that Datadog will recover over the next 2-5 years.
“Datadog is the essential monitoring platform for cloud applications. We bring together data from servers, containers, databases, and third-party services to make your stack entirely observable. These capabilities help DevOps teams avoid downtime, resolve performance issues, and ensure customers are getting the best user experience.” — Datadog LinkedIn page
We are still in the middle of a months long stock market correction that started in mid-November of 2021. Tech stocks and growth stocks like Datadog have been hammered with significant losses. It is important to remember that stock market corrections are normal and part of the investing process. When I invest in companies like Datadog, I maintain a long term investing timeframe which means I plan to hold the stock for at least 3-5 years. It is key to separate the stock price from the company growth. Although the Datadog stock has been hit hard over the last 8 months, the company is doing well and continuing to grow at significant rates. I’m confident that Datadog and many other growth Tech companies will keep growing and will deliver fantastic returns to investors in the future.
SCALE 89 is a free and paid newsletter about Tech, Growth Stocks, Crypto, and Investing. It is based on my 9 years of experience working in Tech and Growth companies and seeing how quickly these companies and grow and scale around the world. Thank you for reading my work and supporting my newsletter.
Disclosure: Not Financial Advice / Not Investing Advice
SCALE 89 and The Author does NOT provide financial, investment, legal or tax advice. None of my content (posts, articles, emails, tweets, images, or videos) can be construed as advice. The author is not advising you to buy or sell a security, stock or crypto asset. This newsletter, article and my tweets are for informational and educational purposes only. By reading my content, you are acknowledging that this is not advice. Please note that my positions can change at any time.
I currently own shares of Datadog (DDOG).