DDOG: The Future of Cloud Monitoring

Tech investors had a spectacular 2021, which culminated in all-time highs for industry leaders’ stock prices in November of that year. However, the celebration was short-lived.

By mid-2022, the entire sector was down. Some tech companies lost 80 percent or more of their value, and even the biggest – Apple, Alphabet, Meta, for example – went down by at least 30 percent. Investors abandoned growth stocks, particularly in tech, and flocked to safer opportunities in hopes of surviving the bear market with their portfolios intact.

This bear market dragged on longer than most, but it has finally turned around. In early June 2023, the S&P 500 crossed a critical threshold when it closed 20 percent higher than its most recent low.

The return to bull market territory is due in large part to major players in tech like Apple, Microsoft, and Alphabet. Their stocks have increased by 30 percent, 44 percent, and 25 percent respectively.

Now that the bull market is official, tech investors are searching for the next big winner, and Datadog is in the spotlight.

Introduction to Datadog

The digital world is expanding rapidly, and it is becoming infinitely more complex. Sophisticated tools are storing, mining, and analyzing the massive amounts of data produced through use of digital technology.

The only companies that can create and maintain a competitive edge are those that can harness the power of all this information, apply it to operations, and keep it secure.

That’s where Datadog comes in.

The nuts and bolts of Datadog products are best left to IT folks, as they are some of the most advanced ever developed. What investors need to know is this:

Cloud computing has gone from nice-to-have to must-have in the digital age. Consumers expect every organization they deal with to have an online presence and user-friendly applications that seamlessly integrate with each other and outside services. Simple user interfaces that perform complex tasks behind the scenes are the standard in most industries.

The challenge is keeping everything running smoothly behind the scenes. Software is notoriously sensitive, and minor code changes, security breaches, and any number of bugs can create significant problems.

The best way to keep things running smoothly is careful monitoring of operations, performance, security, and activity, but that’s easier said than done – especially when there are dozens, hundreds, or thousands of distinct applications running simultaneously.

Datadog is the first company to offer a comprehensive solution to cloud application monitoring and security that doesn’t require in-depth IT training to use. The software provides end-to-end traces, logs, and detailed metrics on cloud applications, infrastructure, and services provided by third parties.

Information is presented in a user-friendly dashboard format, which enhances organizations’ ability to keep systems secure, give customers a high-quality experience, and keep downtime to a minimum.

Datadog’s Potential

Investors are particularly interested in Datadog stock because growth appears poised to increase sharply.

The addressable market for Datadog monitoring and security products is based on growth in cloud spending, which is estimated to reach $1 trillion in 2026 – double the 2022 figure.

Based on that information, Datadog projects its addressable market will grow by more than a third in the same period – from $41 billion in 2022 to $62 billion in 2026.

Datadog’s Valuation

As of mid-June, Datadog’s market cap stands at $30.91 billion, which is reasonably consistent with its valuation. Key metrics include:

  • Price to Book – 16.44

  • Price to Sales – 12.93

  • Price to Tangible Book Value – 22.18

  • Price to Free Cash Flow (TTM) – 62.65

  • Enterprise Value to EBITDA – (-1,174.75)

  • Free Cash Flow Yield – 1.6 percent

Datadog delivered impressive results for the first quarter of 2023, and share prices have gone up considerably since the earnings call on May 4th. The stock is well above its 52-week low of $61.34 per share experienced earlier in the year, though still below the 52-week high of $120.75 per share achieved in August 2022.

Datadog’s Growth

Last year’s sudden decline in tech stocks impacted Datadog along with most of its peers, but there is no indication that any long-term damage was done.

Datadog reported better-than-expected growth for the first quarter of 2023, and full-year guidance indicates the company’s leadership is expecting a substantial increase in revenue for the remainder of this year and beyond.

Highlights from the first-quarter earnings report include:

  • Revenue – $481.7 million, up 33 percent year-over-year

  • GAAP Operating Loss – $(35.0) million

  • GAAP Operating Margin – (7) percent

  • Non-GAAP Operating Income – $86.4 million

  • Non-GAAP Operating Margin – 18 percent

  • GAAP Net Loss per Diluted Share – $(0.08)

  • Non-GAAP Net Income per Diluted Share – $0.28

  • Customers with ARR of $100,000 or more – 2,910, up 29 percent year-over-year

During the first-quarter earnings call, leadership projected full-year revenue of $2.1 billion – a 25 percent increase over 2022.

Leaders went on to say that the pace of top-line growth will accelerate over the next two years, which is good news for shareholders.

Datadog’s Risks

All stocks carry risk, and Datadog’s risk is somewhat higher as compared to established companies. After all, Datadog is not yet profitable, and there is no guarantee that it will be in the future.

However, most industry experts agree that Datadog isn’t on the highest end of the tech startup risk spectrum.

Among other advantages, it has a marketable product, a workable business model, and a solid client base. More importantly, Datadog has a wide moat and would-be competitors will have a difficult time catching up.

Datadog’s Future

Datadog has already set the standard for cloud application monitoring and security, but that doesn’t mean it is resting on its reputation.

The company has a robust research and development division that is constantly at work on refining existing products, adding new features, and otherwise expanding the platform’s capabilities. This, in turn, is making the company and its family of products and services more appealing to prospective customers, and Datadog has had tremendous success in retaining existing clients and attracting new ones.

In April, Datadog introduced a number of enhanced security features housed in its Application Vulnerability Management software. Among other enhancements, the system is capable of increasing visibility into the production environment by surfacing vulnerabilities automatically.

The beauty of this feature is that it doesn’t overwhelm users with thousands of equally prioritized areas of vulnerability. Instead, the technology is capable of prioritizing risk based on potential impact to the business. Better still, it connects operations, development, and security contacts to ensure end-to-end collaboration on solutions.

This is just one example of the continuous improvement and innovation that sets Datadog apart from others in the data management and cybersecurity space.

Advice for Investors: Is Datadog Stock A Buy?

Based on the unique nature and high quality of its product – and the company’s particular expertise – analysts and industry experts have high expectations for Datadog’s growth potential and ability to return value to shareholders. Some have projected the stock will increase by 86 percent over the next three years.

Even if the 86 percent estimate is overly optimistic, the company is likely to deliver strong returns for shareholders. In short, Datadog stock is a buy – but be judicious; share prices have already gone up 33 percent year-to-date.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.