In today's increasingly digital world, businesses need reliable technology infrastructure to succeed. Customers don't want interruptions or hangups in their streaming videos, online purchases, or investing transactions. Datadog (DDOG 4.04%) can't entirely prevent technology problems from happening, but its monitoring platform is really good at giving the people who run those systems proactive insights and early warnings to prevent such problems before they happen. Here are three reasons why that operational expertise could lead to healthy returns for Datadog investors.
1. Datadog makes an increasingly complex job simpler and easier for its customers
Information technology platforms have gotten increasingly difficult to monitor, operate, and keep running smoothly, owing partly to the sheer number of different ways that businesses use them.
According to identity management specialist Okta, enterprises with 2,000 or more employees use an average of 175 applications, while smaller businesses with 1,999 or less employees use an average of 73 applications. Some are powered by physical data centers, while others rely on one of several different cloud computing services.
Image source: Getty Images.
Datadog helps organizations build reliable technology infrastructure by detecting, preventing and repairing technology failures faster. It works with every kind of technology businesses might use, collects information those businesses need to make sure their computer systems stay up and running, and presents that information in ways that the people running those systems can easily understand.
2. Datadog's excellence in product innovation is expanding its market opportunity
Consistent innovation helps Datadog stand out from the pack. After the company built its core infrastructure monitoring platform, it has continued to add important capabilities that cover more and more aspects of monitoring, as this graphic from a recent investor presentation demonstrates:
Image source: Datadog earnings presentation.
In October 2021, Datadog announced 10 more new products and features. And as recently as last week, the company announced a new product to help detect and protect their users' sensitive personal data, and avoid running afoul of regulations designed to protect users' privacy.
Making new products helps Datadog sell more of those offerings to new and existing customers:
|
Key Customer Metrics |
Sep 30, 2021 |
Sept 30, 2020 |
Growth (%) |
|---|---|---|---|
|
Total customers |
17,500 |
13,100 |
34% |
|
Customers generating $100,000+ in annual recurring revenue |
1,800 |
1,082 |
66% |
|
Using 2 or more products |
77% |
71% |
11% |
|
Using 4 or more products |
31% |
20% |
15% |
Source: Company earnings releases and transcripts.
The company also stated that its net dollar retention rate – how much more the average existing client spends from one year to the next – has topped 130% for the 17th consecutive quarter. Generally, a net retention rate over 120% is considered excellent. This rising popularity is helping Datadog increase its total addressable market opportunity from an estimated $38 billion in 2021 to $53 billion in 2025 – a 40% jump.
Once customers start using Datadog, it becomes very difficult for them to get away. It takes time, effort, and expense for companies to adopt its platform, and even more for them to replace it with a rival product. And in many cases, no competitor can easily meet all the customer needs that Datadog can; switching would require customers to adopt multiple other solutions. This one-stop-shop simplicity helps Datadog keep rivals at arm's length.
Datadog has built a resilient and scalable business model
The company's third-quarter results underscore the scalability and efficiency of Datadog's business model. Datadog's Q3 revenue grew 75% year over year to $270 million, accelerating from 67% year-over-year growth in Q2 and 51% growth in Q1 – and suggesting that Datadog's business is gaining momentum.
Incredibly, the company accomplished that growth on top of its customers' already higher COVID-19-fueled digital transformation spend in 2020. That's impressive for any company, but especially rare for one with annual recurring revenue over $1 billion. Datadog was able to achieve this high growth while spending less on sales and marketing as a percentage of revenue, down from 37% a year ago to 28% in Q3 2021.
Additionally, the company reduced its third-quarter net loss from $15 million a year ago to $5.5 million, just 2% of its quarterly revenue. Free cash flow, which measures how much cash a company has left over after paying its crucial bills, almost doubled to $57 million from $29 million a year ago.
Furthermore, the company's plowing more of that cash into research and development to continue its dominance in product innovation. R&D investment is up by almost 100% over the third quarter of 2020, reaching 41% of revenue, and giving Datadog's streak of lucrative new innovations plenty of fuel to continue.
Excellent long-term investment for patient investors
Datadog investors have priced huge future growth expectations into its shares. Any misstep in execution, or even a one-off miss in quarterly results, could send short-term prices plunging. Additionally, although Datadog has established a strong lead in the monitoring and observability race, competitors are not going to stay static. It is important to keep a close eye on competitors such as New Relic, Dynatrace, Elastic, and Splunk, and continue to review whether and how they may challenge Datadog's strong position.
Its customer-focused approach and culture of innovation let Datadog offer solutions its rivals can't touch. Investors interested in cloud computing with long time horizons should consider a small position as part of a diversified portfolio. If the company can continue its outstanding execution, it could be a big winner in the long term.
