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Why This SaaS Company Will Thrive in Industry Consolidation

By Brian Stoffel - Feb 22, 2021 at 3:00PM

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Because it offers such a large umbrella, this company will thrive.

For years now, it has seemed like any stock associated with a software-as-a-service company (SaaS) company could do no wrong. And why not? Once this powerful business model reaches a certain tipping point in scale, cash flows grow by leaps and bounds. Not only that, but the business is largely protected via high switching costs.

But there will be a day -- probably not too far down the road -- when a level of reality will set in. Not every SaaS company will succeed, and when looking toward the future, you want to be invested in the ones that provide tools that companies cannot live without.

In this segment from Motley Fool Live, recorded on Feb. 12, Motley Fool contributor Brian Stoffel discusses the main reason he owns Datadog (DDOG 1.01%) and believes it will be one of the SaaS companies that remains relevant for years to come.

Brian Stoffel: So real quick, Datadog (DDOG 1.01%). This was founded by two people who were both the co-CEOs of the company. They've got hard names pronounce, so I'm just going to skip that. One worked in development, one worked in operations. What they noticed was there are at these two different parts of the company and they were never talking to each other. So they said, "We need to develop tools so that people over here and people over here can talk to each other and know that they're talking about the same thing." So what Datadog does is they make it easier to see everything that's going on digitally in your company.

I've talked about this before: One of the reasons that I am a shareholder and I'm excited about it, is because I think that the day is coming where we're not going to go out and get the best software solution for every single tiny niche thing we have. Mostly because that takes a lot of time and effort and also that's a lot of relationships to manage. That would be like if I am redecorating my home and I get a different contractor for my hinges, and a different one for my doors, and a different one for my door knobs and a different one for this and this as opposed to just saying, getting someone who offers all of it. That's why I like Datadog because they are building it out; and if they have good enough solutions, I think that they can win in this space.

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