Datadog ( DDOG -2.15% ), a supplier of monitoring and safety options, introduced not too long ago that tech stalwart Microsoft is increasing its partnership with the corporate — an enormous stamp of approval of Datadog’s rising capabilities. Datadog has been delivering nice outcomes since going public in September 2019, however many buyers are nonetheless fretting over the corporate’s excessive valuation and have averted investing in Datadog. Let’s assessment why which will develop into an ill-advised determination for long-term buyers.
Picture supply: Getty Photographs.
Rising dominance within the monitoring market
Dependable know-how infrastructure is pivotal for companies to reach at present’s digital-first world. Datadog, with its rising suite of monitoring and safety merchandise, offers early warning indicators and key insights to detect and proactively deal with potential know-how issues which will in any other case result in enterprise disruptions.
On March 30, 2022, Datadog introduced that it’s now a Microsoft accomplice throughout the Azure Cloud Adoption Framework — Microsoft’s roadmap for corporations to efficiently migrate their know-how purposes from legacy information facilities to Microsoft’s Azure cloud computing platform. Datadog was already a Microsoft accomplice, the place clients may discover Datadog merchandise within the Azure market. Nevertheless, the mixing and promotion of Datadog in Azure by Microsoft, the second-largest firm on the planet by market capitalization is a serious endorsement of Datadog’s capabilities.
Additionally, companies seeking to transfer to Azure — a high cloud supplier with about 22% market share in 2021, based on Statista — will now get to find out about Datadog, and the worth it offers, sooner of their Azure adoption journey and are probably extra prone to undertake Datadog.
Along with Microsoft’s Azure, Amazon Internet Providers, and Alphabet‘s Google Cloud Platform have additionally partnered with Datadog. Partnerships with the highest three cloud suppliers that collectively boast a 64% share of the cloud computing market on the finish of 2021, spotlight Datadog’s important function within the cloud infrastructure, a important crucial for companies within the more and more digital world.
Excellence in product innovation is resonating with clients
With consistently altering enterprise and know-how landscapes, IT platforms have gotten more and more tough to watch, function, and hold operating easily. Datadog makes these advanced duties simpler for its clients.
Datadog is consistently innovating and including new merchandise to its providing, serving the broader wants of its clients and, in flip, capturing a larger share of shoppers’ wallets.
Picture supply: Datadog earnings presentation.
As of the fourth quarter of 2021, Datadog’s internet dollar-retention fee — how way more the typical present consumer spends from one yr to the subsequent — has topped 130% for the 18th consecutive quarter. Datadog’s largest clients proceed to indicate a rising affinity for its merchandise: Clients with $1 million or extra in income greater than doubled from 101 on the finish of 2020 to 216 on the finish of 2021. In the meantime, clients with $100,000 or extra grew by 63%, from 1,228 to 2,010 for a similar interval.
Datadog’s excellent execution led to a whopping 70% year-over-year income development in 2021. That is spectacular for any firm however particularly uncommon for one with annual recurring income over $1 billion. And whereas the corporate acknowledged a modest $2 million loss in working margin in 2021, it generated over $250 million in optimistic money stream.
With its superior product set yielding such robust traction with clients, it’s no shock that, regardless of having their very own monitoring providers, the tech giants are inviting Datadog into their ecosystems.
Ought to buyers ignore the valuation?
As of this writing, shares of Datadog had been buying and selling at an eye-popping price-to-sales valuation of 41. Though that quantity is down from over 70 in November 2021, it’s nonetheless larger relative to its historic multiples, which means that the market’s confidence and expectations of Datadog have grown over time. Any missteps in execution or a miss within the outcomes even for one quarter can dramatically influence Datadog’s shares within the brief time period. Such worries might discourage buyers from taking a place within the firm.
DDOG PS Ratio information by YCharts.
The market is demanding a comparatively larger worth premium for Datadog as a result of it has confirmed to be a high-quality enterprise with sustainable development. Datadog expects to hold that momentum into 2022 with a income development forecast of about 50%. Because of its increasing product suite, Datadog is projecting its addressable market to develop 40% from $38 billion in 2021 to $53 billion in 2025. With its 2021 income of $1 billion, the corporate is barely scratching the floor of the chance in entrance of it. And Microsoft’s increasing partnership with the corporate simply reinforces that prospect.
Sitting on the sidelines might imply lacking out on nice returns in the long term. For buyers with long-term time horizons and well-diversified portfolios, a balanced method could possibly be used to construct a place incrementally. Primarily buyers take a small place within the firm, monitor its efficiency over coming quarters, and add later at probably extra enticing valuations if the corporate continues to execute properly.
General, Datadog’s excellence in product innovation, excellent execution, and alternative to develop right into a a lot bigger enterprise place the corporate to be a long-term winner.
This text represents the opinion of the author, who might disagree with the “official” advice place of a Motley Idiot premium advisory service. We’re motley! Questioning an investing thesis – even one in every of our personal – helps us all assume critically about investing and make choices that assist us turn into smarter, happier, and richer.
