Why Datadog Stock Is Still a Smart Buy

Datadog (DDOG 1.65%) specializes in monitoring and analytics. Specifically, its software platform leans on artificial intelligence to identify performance and security issues across infrastructure, applications, and networks, helping clients accelerate the investigation and resolution of problems in their digital ecosystem.

In this Backstage Pass video, which was recorded on Nov. 5, 2021, Motley Fool contributor Brian Withers and Fool analyst Tim Beyers discuss Datadog's third-quarter financial results, while also highlighting the company's prospects for future growth.

Brian Withers: I'm going to start with Datadog. Let me share the screen first. They had a blowout quarter. Oh, my gosh. Beat and raise -- $270 million, up 75% year-over-year. I don't particularly like non-GAAP earnings per share, but they doubled analyst expectations there and then blew away by about $30 million, I think, the outlook from what analysts were saying for the quarter.

I had to cut back on the highlights year. The $100,000 customers, the ARR, annual recurring revenue, up 66%. So their biggest customers, these customers here make up 80% of their annual recurring revenue. This free cash flow -- man, you can't ask for a better one -- doubling year-over-year. Dollar base net revenue retention; this was 130%. We'll do it on the fly, 130, pretty solid number all around.

They have tons of customers using four or more products. That's up from 20%. Then what's exciting to me, Tim, is that the new logos are coming in and not just landing with one platform or one product, but coming in with two. Then their dash conference, they just announced a ton of products. Just adding to their ecosystem of things that can land and expand with customers. It's been a little bit of a rocky ride this year, but they've soundly beat the S&P 500 over the last year. And almost any period you look at with Datadog since it went public, it's been tremendous.

Tim Beyers: The dogs got bite. We've been saying that for a while. There's a couple of things just to add some color on this, principally from the call. This is not from the call, but this is just what we know using it internally at The Motley Fool. The way that Datadog or Datadog depending upon you say tomato I say tomato, whatever. The way that they sell product is they turn on a service and they expose it to their customers and say, "what do you think of this?" They just turn it on, and you're not paying for it yet. You're just trying it out. And as they get feedback on those features, those become the products that find their way into beta programs that become a little more official. Which is how you scale with minimal investment and rising gross margins to a billion dollars -- with a "B" -- a billion dollars in annual recurring revenue, because that's where they are now. That's where they entered in this quarter.

A couple of other things that they are looking at right now, and why you should believe that Datadog is going to keep growing, the number of products that are in beta but not yet fully baked. Cloud cost management, which is something we know is an issue. Like you have a series of relationships with cloud providers. How much are you actually paying those cloud providers? Could you get away with paying a little bit less? How would you optimize that? As a service that observes everything you're doing in your network, Datadog has some insights about that. They have some insights about security. They have insights about all things. Each one of those insights, Brian, can become a product that leads to that very high -- and by the way, that 130%, they don't give a specific number. They've just done that repeatedly for I don't even know how many quarters in a row now. It's a minimum of eight that they've done this. It's quite a few. They are getting customers to spend more. The way that they get the spend more is by providing more value. Verifying that value at the point where the customer is and not charging for it. Then once they prove value, then they make it something that you can pay for. It's insidious and brilliant, but it's also customer-friendly, which I really like. Yeah, I'm going to get the chance to interview the CEO, Olivier Pomel, at some point here soon. I'm looking forward to it because, like I said, dogs got bite.

Brian Withers: Yeah. It was really excited about the quarter and been excited about the company for a long time. They spent a lot of time at their dash conference for their investor and product releases talking about how the information technology world is just getting more complex and Datadog fits right in there and helps you look at all of that complexity and one pane of glass. And I think they've got a long runway ahead.

Tim Beyers: Yeah, agreed. I mean, they are generating cash flow. They have a very strong balance sheet. They have a high hit rate with, I think, their R&D dollars. That's what it looks like, which you like to see, because R&D dollars can go into a black hole. It's not that their dollars are better, it's their process does appear to be a little bit better and that's worth paying up for. You asked before on somebody else whether or not it's too late to buy X. I don't think it's too late to start a small position in Datadog. It's up. It's not cheap. Recognize it's going to be a volatile stock over a long period of time. But getting a share or two, it's not a bad idea and then maybe build it out over a long period of time. Just slow build, slow build. Keep it going because this is a very good company.