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4 Reasons Datadog Is a Hot IPO

By Rick Munarriz - Sep 23, 2019 at 8:15AM

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The cloud-monitoring specialist has risen 34% since going public two trading days ago.

One of this month's biggest IPO winners is Datadog ( DDOG 3.47% ). The provider of cloud monitoring and analytics tools went public at $27 on Thursday morning, and two days into its brief trading life, the stock is already fetching 34% more than its initial price tag.

There are a few good reasons why the stock market can't get enough of the shiny new debutante. Let's go over why Datadog and its monitoring service that delivers accountable insight are hot commodities right now.

Wall at Datadog headquarters featuring the Datadog mascot as artwork.

Image source: Datadog.

1. Demand is a beautiful thing

Underwriters were initially looking to price the Datadog deal between $19 and $21, an offering that would have valued the company between $5.5 billion and $6 billion. It wasn't enough.

Investor demand was strong for the IPO, a good sign for near-term returns. Lead underwriters would go on to raise their price range to between $24 and $26 early last week, eventually lifting it again to $27 -- a market value of roughly $7.8 billion -- just ahead of the market debut. The stock has nearly doubled off the low end of its initial pricing range.

2. Growth is always a good look

The popularity of Datadog's multicloud analysis is booming. Revenue soared 97% last year, and it's up 79% through the first six months of the year. Things like a lack of near-term profitability and lofty revenue multiples seem to be more forgivable when a company is growing quickly.

Growth often isn't enough. There are a lot of broken IPOs this year checking in with decent top-line growth. Investing in IPO stocks isn't for the risk-intolerant. However, when strong growth matches a good story -- and Datadog qualifies as a winner on both fronts given its fast-growing platform -- it's an investment that you don't want to invest against.

3. Stickiness matters

Even if you don't have a firm grasp on Datadog's business, it's easy to see if it's clicking with customers. Every quarter Datadog and other tech platforms put out their dollar-based net retention rate, and if it's higher than 100%, it indicates that its existing customers are spending more on additional subscriptions and products than they were a year earlier.

Datadog's dollar-based net retention rate was 146% as of the end of June, and it's not a fluke. The rate has stayed north of 140% through the past couple of readings.

4. Cisco's reported deal offers a floor

An interesting report on the eve of Datadog's IPO last week was that Cisco ( CSCO -1.82% ) might have been interested in acquiring the debutante. Bloomberg reports that Cisco was willing to offer more than the stock's initial price tag at the time. Datadog refused, rightfully concluding that it would be worth more following its IPO.

Cisco reportedly looking to buy out Datadog validates the platform, something that can also be said about Datadog's growing list of big-name clients. Cisco's appetite would also seem to provide a floor for the stock if investor enthusiasm wanes, something to keep in mind if the market loses it initial zeal for Datadog as we've seen with other IPOs that start hot out of the gate before proving mortal.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

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Stocks Mentioned

Datadog, Inc. Stock Quote
Datadog, Inc.
$183.16 (3.47%) $6.15
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Cisco Systems, Inc.
$57.02 (-1.82%) $-1.06

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