Why Datadog Stock Is Well-Positioned for Growth

Datadog's (DDOG -1.80%) potential to expand its customers across government departments just significantly increased. In this clip from "3 Minute Stocks Updates" on Motley Fool Live, recorded on Feb. 16, Motley Fool contributors Brian Withers and Toby Bordelon talk about the importance of understanding your customer and analyze whether Datadog is poised to navigate the government contracting process.

Brian Withers: One of the things Datadog slipped into its earnings report, said that it's achieved Federal Risk and Authorization Management Program Agency authorization at the moderate impact level. What does that mean? This is FedRAMP. Let me explain what that means because I think this is an important event for the company. What is FedRAMP? The government has gotten together and coordinated what it expects from cloud service providers for cloud offerings to be a partner of the federal government. It used to be each of the different agencies had different standards that you had to meet, and now it's all come together under one program. It's called FedRAMP. Just like anything else in the federal government, there's this tremendous process that you have to go through to get approved. You can see all of the different pieces, the agency process or the JAB process, Joint Authorization Board. Regardless, there's a bunch of prep that the company needs to do. There are lots of checks you have to prove, and then there's continuous monitoring at the end. What does the moderate level mean? Well, the low impact security level is essentially any publicly available data. So if the data was compromised, it would have low impact. So, that's really a lot of the government operations. If you are at a low security level, you're really not going to be able to serve those departments really well. If you look at the moderate impact level, this includes personally identifiable information. So if it's leaked, it would have a serious impact and high impact is more like top secret stuff. Let's look at what moderate level means. Well, you can see the different departments here. DOD is about 33% of use cases. The VA is about 16%. Homeland Security is 13%. You see all of these different agencies. When you get to the moderate impact, that will cover nearly 80% of CSP, cloud service provider applications. Now, about 80% of the government's departments are opened up for Datadog to sell to and this is really exciting.

Toby Bordelon: So Brian, our friend, Lou Whiteman, who does a lot of industrial shows on Fool Live here, he follows the defense and government contracting industry closely. One thing he talks about a lot is, at the core competency of companies in this sector is really knowing and understanding your customer, the U.S. government. It's different than the private sector. There can be a big ramp-up in terms of figuring out how to do things and navigating the government contracting process to be successful. So, do you think Datadog is up for that? Are they well-positioned to figure that out?

Withers: Essentially, you look at the difference between low and moderate impact. There probably weren't very many government agencies who were a customer of Datadog before they got this moderate impact authorization. I think this is a new thing for them. But, what's cool about the FedRAMP approval is it's for all departments. So now, if there are departments that were looking to use Datadog in the past, now they have the green light to go ahead and reach out to Datadog and start to talk to them about a solution or a contract and what they want to do. I know when I was at Dell (DELL -0.64%), we had a whole separate sales force and a support team specifically for Fed customers. This was a massive undertaking, but in the end it was worth it. I think this is the first step of a long journey, but this opens up a whole new set of customers for Datadog.