Jams first:
The Rookie Lineup
Earnings Season is here. Dates below:
TEAM 0.00%↑ - August 4th
U 0.00%↑ - August 9th
ZS 0.00%↑ - September 8th
SHOP 0.00%↑ - July 27th
COST 0.00%↑ - September 22nd
HD 0.00%↑ - August 16th
CFLT 0.00%↑ - August 3rd
DDOG 0.00%↑ - August 4th
DIS 0.00%↑ - August 10th
COIN 0.00%↑- August 9th
Red flags going into Earnings Season:
COIN 0.00%↑ is going to report an AWFUL quarter…I guarantee it. But the biggest red flag for me coming into earnings season is Brian Armstron’gs recent blog post “Operating efficiently at scale”. On the surface the blog post was fine and made sense, but as an investor in Coinbase, I want Brian to discuss how they’re going to diversify their revenue streams away from Transaction Fees not about SMART goals or operating KPIs. Transaction fees ALWAYS go to zero and Coinbase needs to find different ways to monetize users. I don’t need a blog post about DRIs’ or team structure, I want a blog post about diversified revenue streams and strategy on how they’ll grow revenues WITHOUT transaction fees. I need to see this discussed on the Earnings Report or I will have to rethink owning Coinbase.
COIN 0.00%↑ needs to decrease it’s employee stock-based compensation now. Stop it.
U 0.00%↑ acquisition of IronSource. I think they paid WAY too much. Acquisitions always scare me. They are difficult, expensive, and will take years to realize any potential synergies (if they do at all).
What are you most excited about?
Some of the MOST important companies report next week. Get ready for pain. Or maybe not…
TL:DR
The Rookie Quick Fire Challenge - LINK HERE
Score 54.5 / 81
Overall Verdict: Datadog is alpha. They’ve been destroyed by the market as investors have moved money away from high-growth tech to cash, BUT Datadog is proving to be one of the MOST resilient SaaS companies right now. The next year will be difficult for Datadog, but they are well-poised to survive the storm and will be stronger for it.
Not investing advice. This is fun for me. Due your own work.
Datadog ($ddog)
Step 1+2: Do I understand and like the business? Moat and Future Growth/Catalyst.
What is Datadog?
Datadog is the essential monitoring and security platform for cloud applications. We bring together end-to-end traces, metrics, and logs to make your applications, infrastructure, and third-party services entirely observable. These capabilities help businesses secure their systems, avoid downtime, and ensure customers are getting the best user experience.1
Now in layman terms…Datadog is a Software-as-a-Service company that provides a real-time observability platform for their customers’ entire technology stack. And Datadog is a leader in their space: Datadog named Leader in 2022 Gartner® Magic Quadrant™ for APM and Observability
What problems do they solve?…Several, but mainly, Datadog helps break barriers between Engineering and Operational teams, and the technologies shared between them. Traditionally, Engineering and Operational teams worked in separately connected technology stacks, and this led to poor communication, team friction, and limited visibility into what was actually happening.
In order to help solve this, the role of DevOps was borne and now a mainstay at companies everywhere. The role of DevOps was to bring “developers and IT operations working collaboratively throughout the product lifecycle, in order to increase the speed and quality of software deployment.”2
Datadog aims to serve DevOpts teams everywhere…
…of all sizes and across a wide range of industries to enable digital transformation and cloud migration, drive collaboration among development, operations, security, and business teams, accelerate time to market for applications, reduce time to problem resolution, secure applications and infrastructure, understand user behavior and track key business metrics3
How has Datadog been doing lately? In Q1’22, their revenue grew 83% year-over-year to $363 million, and increased their large customer base to about 2,250 @ $100k+ ARR customers (this is up from 1,406 a year ago).
They had a free cash flow of $129.9 million in Q1’22, and a dollar-based net retention
rate above 130% for all of 2021. That’s a DBNR that even Kim Kardashian approves
They’re able to achieve these outstanding results via their land-and-expand strategy.
As of March 31, 2022, approximately 81% of our customers were using more than one product, up from approximately 75% a year earlier.4
I love this. BUT where does Datadog go from here? They need to continue innovating and pouring money into Research and Development. In 2021, Datadog released over +300 features! - thats almost 1 feature per day…yes, the math checks out.
And they will continue to expand their Sales and Marketing teams…
We believe there is a significant opportunity to expand usage of our platform outside of North America. Revenue, as determined based on the billing address of our customers, from regions outside of North America was approximately 28% of total revenue for the three months ended March 31, 2022 and 2021. In addition, we have made and plan to continue to make significant investments to expand geographically, particularly in EMEA and APAC5
With that said, Datadog’s Sales & Marketing spend is something to watch. Over the last 12 months, they’ve increased their S&M spend by nearly 100%. This is fine as long as revenue and free cash flow continue to grow. But if revenue slows, S&M will need to be monitored.
Another red flag is that Datadog is expensive. They’re currently trading at a Price / Sales of 24x and is 54% off it’s all-time high. DDOG 0.00%↑ has been cut in half and it’s STILL extremely expensive.
In markets like these where everything trades with sentiment (sentiment is negative right now if you haven’t heard) Datadog’s stock price can continue to be punished even if it continues to perform as a business.
Verdict: I understand the business and I like it.
Step 3: Management
Olivier Pomel is the CEO and Founder. He owns around 3% of the company.
Founder = Check
Skin-in-the-game = Check
Glassdoor Reviews*
93% Approval Rating
4.2/5 Stars on ~500 reviews
I liked this interview by SaaStr with Olivier (pre-IPO).
And I enjoyed Datadog’s DASH 2021 Keynote:
They have an amazing YouTube Channel. It’s great having this level of access to Datadog and it reflects their culture.
*Glassdoor is not a heavy emphasis in my process, but good directionally
Verdict: Solid.
Step 4: Valuation
Snapshot Numbers:
Here are the numbers (source Tikr.com):
Market Cap: ~$29B
Enterprise Value: ~$28.7B
Shares Outstanding: ~315B
NTM Total Enterprise Value / Revenues: 16.2x
EV / EBITDA: 103x
NTM Market Cap / Free Cash Flow: ~86.5x
Price to Sales: 24.6x
Gross Profit Margin: 78%
Current Ratio: 1.65x
DDOG 0.00%↑ is down 42.75% YTD AND even with all of that pain, they’re still trading at an expensive valuation. They’re priced for perfection, but they’ve proven to be a crown-jewel in the crown of SaaS.
Caveat: Datadog’s valuation could vary greatly based on your STORY and future assumptions. For this reason, I’ve outlined a few scenarios below (do your own homework):
High Growth - $176
Steady Growth - $80
Slow Growth - $40
As always, I like simple math. I ran a ‘rough’ DCF for each of the following scenarios above and then applied a 15% Margin of Safety on each value.
Here were the following assumptions for each scenario:
Growth: a discount rate of 10%, growth rate of 75% (years 1-5) and 30% (years 6-10), and a terminal multiple of 10x
Steady: a discount rate of 10%, growth rate of 45% (years 1-5) and 30% (years 6-10), and a terminal multiple of 8x
Slow: a discount rate of 10%, growth rate of 40% (years 1-5) and 15% (years 6-10), and a terminal multiple of 5x
Things to watch for:
Rapid product releases and innovation
FCF growth and spending on S&M
DBNR growth and growth of large customer (over $100k ARR)
Additional Resources:
https://www.datadoghq.com/about/leadership/
https://www.atlassian.com/devops
Datadog, Form 10-Q- https://investors.datadoghq.com/sec-filings/sec-filing/10-q/0001561550-22-000026
Datadog, Form 10-Q- https://investors.datadoghq.com/sec-filings/sec-filing/10-q/0001561550-22-000026
Datadog, Form 10-Q- https://investors.datadoghq.com/sec-filings/sec-filing/10-q/0001561550-22-000026