Cloud stocks have seen quite the run lately, and Datadog (DDOG -3.94%) is no exception. The stock price has more than doubled since its debut in September 2019, and it carries a lofty valuation. But investors haven't missed out.
The best days for this cloud monitoring platform are yet to come. Let's dive into why you may want to pay up for this investing gem.
The business of cloud monitoring
Datadog founders Alexis Lê-Quôc (left) and Olivier Pomel. Image source: Datadog.
Datadog was founded in 2010 by two information technology professionals who worked in different areas. Alexis Lê-Quôc and Olivier Pomel found that the department (development or operations) they worked in colored their perspectives and often made it difficult to find common ground. They started Datadog "to build a real-time data integration platform to turn chaos from disparate sources into digestible and actionable insights" and break down the silos between departments.
The platform started with a single unified data model and robust visualization tools that provided a solid foundation to build on. It added infrastructure monitoring in 2012, application performance monitoring in 2017, log management in 2018, and user experience monitoring in 2019. But it hasn't stopped growing its platform. With the recent acquisitions of Sqeel and Timber, its platform is becoming even more robust. This innovative set of application and technology monitoring services is becoming a must-have toolset for its customers in the cloud age.
The incredible growth engines
The company's broad set of products is winning new customers. It added 3,700 customers in 2020, a 35% gain to bring its total to 14,200. But its existing customers made up a solid portion of revenue growth as demonstrated by a strong and consistent 130% net dollar retention rate. A whopping 72% of customers use two or more of its products, up from 58% a year ago. A solid 22% of customers are using four or more modules, more than double the 10% rate from the end of 2019. No wonder the company has been able to post 50% plus revenue gains over the last three years and seen a robust growth of its already large contingent of $100,000-plus-in-annual-revenue customers.
|
Metrics |
2018 |
2019 |
2020 |
|---|---|---|---|
|
Revenue |
$140 million |
$114 million |
$604 million |
|
YOY growth |
68% |
85% |
56% |
|
$100,000 ARR customers at year-end |
453 |
858 |
1,253 |
|
YOY growth |
90% |
89% |
46% |
Data source: Company earnings releases. YOY=Year-over-year. ARR = annual recurring revenue.
But that's not all. In its most recent quarter, 75% of new customers are starting out with two or more modules. This shows that the company's integrated platform is being recognized for the value it brings even for its newest clients.
Growing into a massive market
The market for cloud monitoring software is fairly new, but it's not small by any means. In the company's prospectus from September 2019, it estimated its addressable market was $35 billion. Given its $604 million in trailing 12-month revenue, it has plenty of opportunities to continue to grow for many years to come. But the company is not resting on its laurels.
Image source: Getty Images.
It spent $210 million in 2020 on research and development efforts to enhance its platform. This represents a strong 35% of revenue and helps keep existing customers on the platform by providing a constant stream of new features. It also spent $213 million on sales and marketing to attract and retain customers. Additionally, its new acquisitions (mentioned above) not only enhance the platform's capabilities, but expand its addressable market as well.
The company is plowing all of its profits into growth efforts, racking up $16.7 million in losses for 2020. But the strong balance sheet with $774 million in cash and marketable securities will enable the company to continue to fund growth efforts for many years to come.
Is Datadog a buy?
Datadog stock isn't cheap by any stretch, with a price-to-sales ratio at a lofty 49. But the runway of growth for the cloud monitoring specialist is long, and its history of innovation and customer adoption proves it can continue to win going forward. This stock is a buy for investors who are interested in playing the long-term trend of cloud adoption.
But one word of warning. Growth stocks with high valuations like this one often experience significant price swings (both up and down). If you like what you see, buy a small position and add to it over time. I'm sure that as an owner of this "dog," it will bring you many years of happiness (and profit).
