Is Datadog a buy?

As companies move towards the cloud and use more software, they need to better understand how their systems are performing. Datadog (NASDAQ:DDOG) is a provider of cloud monitoring and analytics tool. It is used by companies who run their apps and operations in the cloud. It operates on a subscription-based B2B model and has users in sectors like financial services, healthcare, retail, manufacturing & entertainment. We’re going to look into the story so far and investigate if Datadog is a good investment.

Datadog’s Story So Far

Datadog, incorporated in 2010, surpassed 1,000 customers in 2015, 5,000 in 2017 and currently has over 9,000. In some ways, Datadog represents the best of both worlds when it comes to startup-turned-market debutants: exceptional growth combined with break-even operations.

It recently reported 83% year-over-year revenue growth for 2019. The gross margins are roughly 76%, slightly higher than its competitors, but it still operates on an operating loss, although they are getting closer to profitability with a GAAP operating loss of $20 million for 2019. Given it’s rapidly expanding operations this is a promising figure.

While the revenue and customer numbers may look exciting, it’s important to monitor ARR (average recurring revenue) customers, which is an essential metric in the SaaS (software as a service) industry. It shows how much recurring revenue one can expect on a yearly basis. In 2019 Datadog reported 858 customers with an ARR of $100,000 or more — an increase of 89% from last year and approximately 50 customers with an ARR of $ 1 million or more. 

With solid metrics around revenue, it has made a few acquisitions in the past including Logmatic.io, a Paris based log analytics vendor, and Madumbo, a big acquisition in the synthetics market. Through these acquisitions, Datadog has been successfully expanding horizontally into tracing, log analytics, and synthetics, which operationally diversifies the company and makes it a less risky investment.

Datadog’s Valuation

After rejecting a $7 billion acquisition offer from Cisco (NASDAQ: CSCO), Datadog went public on September 19, raising $709 million at a $10 billion valuation. 

Datadog goes for a 18 times trailing-12-month revenue, which is a strong ratio considering its growth figures. Compare this to other high-growth stocks like Zoom Video (NASDAQ:ZM) and CrowdStrike (NASDAQ: CRWD), that are valued at a much pricier 47x and 38x trailing sales respectively. Rival Dynatrace (NYSE:DT), which listed at the start of September, is currently valued at about $5.47bn, or some 19x trailing sales, making Datadog look an attractive investment right now in comparison. 

It’s more appropriate to look back at the October 2018 IPO of Elastic (NYSE: ESTC). The two companies are roughly the same size (trailing sales of about $270m) and post similar growth rates (70% for Elastic, 80% for Datadog). Elastic currently enjoys a market capitalization of about $3.72bn, or 14 trailing sales. 

Is Datadog a buy?

It’s relative valuation as a growth stock looks very attractive, and in spite of its most recent growth figures falling short of investors’ high expectations, there remains plenty of road left for this burgeoning business. Strong margins, revenue growth, and market positioning point us toward Datadog being a good, long term buy.

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