In Q3, Stanley Druckenmiller’s Duquesne Family Office significantly rebalanced its portfolio and went on a large buying spree in the tech sector.
One of the most prominent transactions was a tripling of the firm’s holdings in Datadog (NASDAQ:DDOG). Duquesne’s stake in the company rose from 298,000 shares in Q2 to 789,000 by the end of Q3.
Here are some of the possible reasons for Druckenmiller’s bullishness on Datadog:
Datadog is a software company specializing in cloud monitoring and IT observability. Datadog’s platform allows businesses to collect and analyze data in real time. It also automatically flags potential performance issues for review, offering a predictive approach to IT management.
Critically, Datadog’s platform can be integrated with a variety of operating environments, allowing businesses to easily use it in conjunction with their existing IT infrastructure.
Is Druckenmiller Buying the Dip?
The simplest explanation for Druckenmiller’s decision to buy more Datadog is that the stock is trading at steep discounts to its recent heights.
Datadog is down nearly 60 percent YTD, and the stock is still trading near its 52-week low. As such, it seems likely that Druckenmiller may simply have decided to acquire more of a stock he was already bullish on while prices remain low.
This view is somewhat supported by Druckenmiller’s buying history with Datadog. In Q4 2019, the investor added 25,800 shares at an average price of $35.97 to his firm’s portfolio shortly after its IPO. That stake was sold in 2020 for $60.88 per share.
Druckenmiller didn’t choose to buy back into the stock until Q2 2022. This history suggests that Datadog could be an opportunistic buy brought on by a pullback in share prices.
Datadog’s value metrics also seem to support the idea that Druckenmiller is taking advantage of the stock’s dip. The company’s price-to-sales ratio of 17 is nearly 50 percent lower than average since its IPO. Datadog also enjoys a cash cushion of $1.7 billion, giving it a manageable debt-to-equity ratio of 0.57.
However, it should be noted that the average price of the shares acquired in Q3 was $100.71. This is well above the most recent price of $75.78. If Druckenmiller really is buying the dip, therefore, it’s quite possible that further buying activity will be reflected in reporting for Q4.
Datadog’s Long-term Potential
While Druckenmiller clearly treated Datadog as a quick flip in 2020, his current position may be a longer-term venture. This is especially true in light of the recent tripling of his holdings in Datadog, which seems to suggest that Druckenmiller may be trying to build a long-term stake in a company he firmly believes in.
Datadog’s observability product is enjoying widespread adoption, leading to explosive growth in its user base. Amazon’s AWS lists Datadog as a strategic partner, giving the startup an inroad to AWS’s base of enterprise, academic and small business clients.
Gartner Research has also dubbed Datadog an industry leader in IT observability. As the move toward cloud computing continues, it seems very likely that demand for Datadog’s monitoring services will remain strong.
Over the next five years, analysts expect Datadog to grow at an average annual rate of about 47 percent. Although 2022 will likely be an anemic year for the company, forward guidance from management suggests that earnings could rise significantly in 2023.
Management also believes that the addressable market for Datadog’s products could reach $62 billion by 2026. Cumulatively, these facts suggest that the next several years could be very positive for the company.
What Else Is Druckenmiller Buying?
Some clues to the Datadog acquisition may be found in Druckenmiller’s other recent trading activity. The investor’s recent buys include Workday, Palo Alto Networks, Amazon and Meta. Outside of the tech world, Druckenmiller also massively increased his stake in pharmaceutical company Eli Lilly.
One interesting item on the sell side of Druckenmiller’s portfolio is Microsoft. Despite an obviously tech-heavy portfolio, his stake in Microsoft was cut by more than 70 percent in Q3.
Other sales focused on chemical, materials and oil stocks, but Microsoft was the only tech holding to be reduced. This suggests that Druckenmiller may be hunting for bargains among more sold-off companies.
Another interesting point is that this surge of tech buying goes against the view Druckenmiller held as recently as Q2, when he sold considerable portions of his tech portfolio on fears of a coming recession.
In fact, his firm completely exited its position on Amazon in the second quarter. The recent buying spree, including the Datadog purchase, could, therefore, reflect a revised view of macroeconomic dangers on Druckenmiller’s part.
Indeed, the view that Druckenmiller is trying to get out in front of a potential bull market could explain several of his purchases. Datadog’s IT observability platform, Workday’s enterprise management software and Amazon’s eCommerce and cloud computing business lines would all benefit greatly from an economic recovery.
Taking advantage of high-growth companies like these at today’s prices could net Druckenmiller considerable profits when another bull market begins.
So, Why Did Stanley Druckenmiller Buy Datadog?
As you can see, there are several compelling arguments in favor of the recent Datadog purchase. The stock’s pullback has left it significantly undervalued, making it a strong potential as a value purchase.
The company also has considerable long-term potential, suggesting that Druckenmiller could have purchased it as a buy-and-hold position after flipping it quickly two years ago.
While only the team at Duquesne knows the specific reasons behind the purchase, it’s likely that all of these factors played a role.
As a significantly undervalued company with long-term potential, Datadog is a versatile acquisition for Druckenmiller’s firm.
Druckenmiller may well be able to sell the stock a year from now for a decent profit as he did in 2020. Alternatively, he could choose to hold it for the long haul for maximum returns. Along with other high-growth tech stock purchases, Datadog could allow Duquesne to take advantage of the next stock market boom in a variety of ways.
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