Datadog (DDOG 3.86%) is a hot new software-as-a-service IPO, but it's not getting that much attention. That's a shame, because this analytics platform looks like it has some serious long-term potential.
In this segment from Industry Focus: Tech, host Dylan Lewis and Fool Joe Solitro dig into the business and explain what they actually do, how investors can tell that they're actually good at it, some of the most promising details from the S-1, why Datadog's metrics are so impressive, and more. Plus, learn some tips for making sense of the competitive landscape in a field you don't know much about.
To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.
This video was recorded on Sept. 20, 2019.
Dylan Lewis: OK, we're going to talk about Datadog, a company that just went public this week, we had to get up to speed quickly on this one because shares just hit the public markets this week, Joey.
Joey Solitro: Datadog is a monitoring and analytics platform. What they're doing is, they give you a real-time insight into your company's entire technology stack. You could be looking at all your different servers, applications, all your different cloud-based softwares, and you're seeing it in one spot. It's almost like giving you a bird's eye view of your entire organization. You know, if something's going wrong, where it's at, it allows you to search it. It's basically that key player in digital transformation and cloud migration. It feels like every software company we talk about does the same thing. It's focused on the digital transformation and making it better for customers or businesses finding your service. Datadog, they've made it easier, and put it all on one platform.
Lewis: Even as someone who follows this space -- I know you and I both talked about this before -- it can be tough to really separate what a lot of these SaaS companies do. I know that you have some tricks for getting to the root of, "Who's truly the best in class provider here?" There are some company metrics that you can help do that with. I know that you like to ask around the Fool for some of the subject matter experts that work in spaces. You have a couple other tricks for, also, getting to the bottom of this stuff with online forums and things like that.
Solitro: How I'll originally go through an S-1 is, I'll completely ignore what a company does. I might know, it's a tech company. I'll look at the numbers first. And when I see over 80% revenue growth and net dollar retention over 140%, a growing customer base -- everything about Data dog from the financial standpoint, I loved. Then I back into, now let's find out what these guys do and what kind of competitors there are. Then, seeing, with the rise of data, and I think it's going to be a five-fold increase in the amount of data companies have to be analyzing over the next 10 years, finding companies that can make sense of it, monitor it, and make the digital process easier, is key. So then I go to tech players here at The Fool. Of course, we use Datadog. Then I'll check sites like G2 Crowd or Gartner Insights, and I'll see what these other developers, people that actually use software, say about these companies. I think it was like 4.5 stars. I'm seeing all these as-good-as-it-gets ratings in comparison to their key competitors. So then I'll look at the competitors. And yeah, it checks out, the reviews aren't as good. They're basically saying, because Datadog is unified platform, where all the other major players integrate within, it creates that all-in-one solution, which is another keyword, I always like to look for. All-in-one solution. They do what other people do, but they combine it all. There might be a competitor for a specific division, but not the entire company.
Lewis: It's great to be a full service provider. It's a pretty excellent space to be in. Listeners, tell us if you've heard this one before: they're a SaaS company, they've got great margins, and they're losing money because they're investing heavily in SG&A. Is that pretty much the easiest way to sum up the financials, Joey?
Solitro: Yeah, pretty much. But I will say -- this wasn't confirmed by management or anything -- I have seen that they do have previous years where they did reach profitability. I found a couple of different blog posts from insiders, but they wouldn't confirm because they weren't supposed to be saying it, but it's like, three of the last seven years, they were profitable. And you look at the margins, they're not burning a lot of cash, not losing a lot of money. It almost seems like they ramped up spend going into this IPO to boost those growth rates, which makes sense. But even then, their net dollar retention over the last 12 months was 146%. In 2017, it was 141%. In 2018, 151%. Those are statistics where I fell in love going through the financials. I don't care what this company does, I'm going to find out a way to love it.
Lewis: [laughs] I think at some point, we may have to build a small shrine to the dollar net retention figure in the studio so that we can occasionally bow to it.
Solitro: Over 140%! That's almost unheard of these days! There's only a few companies. This one, and I think Twilio, and I think PagerDuty was up there, too. Those three companies lately got my attention. Definitely a great statistic.
Lewis: It's the kind of thing you almost have to do a double take on. It's proof. You go to the forums, and you read, "OK, this seems to be a best in class provider." And that's borne out in the metrics as well. You don't get a number like that unless you are proving your value to customers and they're increasing their spend with you.
Solitro: Exactly. I was going through the timeline of the company. It started as this base platform. They did one thing. Then they added another solution. And they've added three new solutions in the last three years. People trust the brand. They know that they're very good at what they do. So then they're like, "We added this to our platform. It's an easy bolt-on. We think you want it, too." That's great to see. That could be the primary reason why we have these three great net dollar retention rates. That could be exactly why they waited to go public, so they could say, "Maybe 2016 was 120%," or something like that; it couldn't have been as great. But they knew, "If we ramp up spend, go public in 2019, we're going to have some great statistics to show for it."
