Watch Out, This Growth Tech Stock Could Soar Soon

Datadog (DDOG 4.95%) has not been spared in the tech sell-off, but there's hope on the horizon for the tech stock considering the massive potential it has ahead. In this clip from "3 Minute Stocks Updates" on Motley Fool Live, recorded on May 25, Motley Fool contributor Brian Withers discusses why Datadog could be a winning stock for long-term investors.

Brian Withers: Datadog has certainly not been spared in the tech sell-off, and it's down 55% from its high and basically flat for the last year. As Brian likes to say, is the stock broken or the business broken? Looking at the latest quarter, I'm going to tell you, it's not the business. Let's dive in and see what happened. Here's a nice chart that they had from their quarterly review of earnings and gives you a nice snapshot of the company overall. You can see a large number of customers, a good bit of customers having more than $100,000 spend of annual recurring revenue. It's on a tremendous revenue growth trajectory at 78% up year-over-year, nice free cash flow margins, 130% dollar-based net revenue retention rate that says that, if a customer spent a dollar with this last year, they're spending $1.30 with us this year. You got to love that sticky platform like that. And then, $1.7 billion in cash and cash equivalents. The company has a ton of money to use to continue to invest back in the business or buy small tuck-in acquisitions, as it sees that. And you can see this platform adoption number here. All of these 14 different products that it has across its data platform, 81% of its customers are using two or more, 35 are using four or more, and 12% are using six or more and all those numbers are up over the last year. Here's a great slide that they just started sharing with investors and you can see that these are those numbers: two or more, four or more, and four or more is tripled over the last couple of years, and customers using six or more has essentially gone from nothing to about 12%. So I think Datadog is firing on all cylinders, and you know what? Toby, I know you're going to ask me. It's profitable. Look at this. This is GAAP profit, this is non-GAAP. With that before stock-based compensation and whatnot, that's a profitable company. You got to love it.

Toby Bordelon: That's not bad Brian. Not everyone's profitable. That's good to see. Here's my question though. Look, honestly, I'm following your presentation here. Maybe it's just me. I don't know that I really get Datadog. Maybe I'm having trouble keeping all of these SaaS companies straight, just flat out, what do they do and why should I be excited about it?

Withers: Yeah, that's a really good question, Toby. And I probably should have done a better job of explaining that upfront but let me share a couple of slides and see if we can make sense of it. First of all, Datadog has come about because technology is getting more complicated and it's harder for businesses to keep track of all of the different things that are going on. Here's a couple of different charts that show you that complexity. First one in the upper left here is the number of technology and tools that a company maybe uses back when everything was standardized and on-premise they had very few vendors, but now tons of businesses are opening up to open source software and Cloud and they have a very diverse technology used. And with that, Software is getting more specific and the number of tools are proliferating considerably. So, it used to just be physical hardware. Now, you are talking about Cloud instances, containers, services, and microservices. You probably don't know what all of those things are, but there's just more things to juggle nowadays for information technology shop and the demand for upgrades is increasing significantly. Used to be that you would make major upgrades once a year and it's graduated to once a day and now it's like if things are broken in the middle of the day, people expect it to be fixed by the end of the day and so the releasing of changes happens very dynamically and the number of people involved across the business is considerable. Take all of these things together and multiply them because it multiplies the complexity. So Datadog is all about, you can see all of these logos that it has on the background. These are links that it has to these different software platforms and it enables all of that stuff to be put forward to IT teams on one screen and you can see over time, initially, they focused on this real-time data platform. They've gotten into infrastructure, application monitoring, log monitoring users services, and now security. More and more things are under the Datadog umbrella, which helps companies look at their IT infrastructure through the Datadog lens and be able to get a really good handle on what's going on. And you know what, this market is massive and it's growing and you can see, here's why it matters to investors. This company has been on a gross tire. They're forecasting 55% growth this upcoming year and, you can see, I loved this quarterly trajectory just up into the right and that's what you want to see with a long-term growth company.