Datadog (DDOG -1.92%) attracted a stampede of bulls when it went public. The cloud-based software provider priced its initial public offering (IPO) at $27 on Sept. 19, 2019, and its stock opened at $40.35 before rallying to a record high of $196.56 on Nov. 9, 2021.
At its peak, Datadog's market cap hit $61.3 billion -- or 36 times the revenue it would generate in 2022. But today, it trades at about $126 with a market cap of $41.8 billion -- which is just 16 times the revenue it's expected to generate in 2024.
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The bulls retreated as Datadog's growth cooled off and rising rates compressed its valuations, but it's still more than quadrupled from its IPO price. Could this niche cloud player eventually become a cloud titan like Microsoft?
What does Datadog do?
Datadog's platform monitors diagnostic data from an organization's cloud servers, databases, and applications in real time. It aggregates all of that information onto unified dashboards to help IT professionals to spot potential problems.
From 2019 to 2022, Datadog's annual revenue had a compound annual growth rate (CAGR) of 67%. Its number of large customers, which generate over $100,000 in annual recurring revenue (ARR), more than tripled during those three years.
But in 2023, Datadog's revenue only rose 27% to $2.13 billion as its number of large customers grew 15% to 2,780. For 2024, it expects its revenue to rise 20% to 21%. Analysts expect its revenue to grow at a CAGR of 25% from 2023 to 2026.
Datadog blamed its recent slowdown on the macro headwinds, which drove many companies to scrutinize their spending on cloud-based applications. However, it still kept its net revenue retention rate around 115% over the past 12 months.
As its revenue growth cooled off, it reined in its spending to stabilize its margins. From 2019 to 2023, its adjusted operating margin improved from negative 1.5% to positive 23%. It turned profitable on a generally accepted accounting principles (GAAP) basis in 2023, and analysts expect its GAAP net income to grow at a CAGR of 58% from 2023 to 2026.
Datadog is still growing, but its market is maturing. The global observability tools and platform market could only expand at a CAGR of 11.7% from 2023 to 2028, according to Markets and Markets, and it's already saturated with similar services like Cisco Systems' AppDynamics and Splunk, Dynatrace, New Relic, LogicMonitor, Microsoft's Azure Monitor, and IBM's Instana.
Could Datadog become the next Microsoft?
Today's Datadog is comparable to Microsoft back in fiscal 1992 (which ended in June 1992), when the future tech giant only generated $2.8 billion in revenue. From fiscal 1992 to fiscal 2023, its revenue grew at a CAGR of 15% to $211.9 billion.
To maintain a CAGR of 15% for more than three decades, Microsoft dominated the PC operating system and productivity software markets, transformed its desktop software into mobile and cloud-based apps, expanded its own cloud infrastructure platform, grew its Xbox gaming business through acquisitions, and made some big investments in the AI market.
The saturation of the observability market could make it tough for Datadog to generate comparable revenue growth over the next three decades. Datadog has expanded its ecosystem with a few acquisitions, but it doesn't seem interested in evolving into a consumer-facing cloud, mobile, artificial intelligence (AI), gaming, and hardware company like Microsoft.
Instead, Datadog should continue to operate behind the scenes and help companies closely monitor their cloud-based applications. That niche focus suggests it's far more likely to be acquired -- just as AppDynamics, Splunk, and NewRelic were in recent years -- instead of staying independent and evolving into a tech titan like Microsoft.
