3 reasons to invest in Datadog

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In today’s increasingly digital world, businesses need a reliable technology infrastructure to be successful. Customers don’t want interruptions or blockages in their streaming videos, online shopping, or investing transactions. Datadog (NASDAQ: DDOG) can’t entirely prevent technology glitches from happening, but its monitoring platform is really good at giving the people who run these systems proactive information and early warnings to prevent such problems before they happen. Here are three reasons why this operational expertise could lead to healthy returns for Datadog investors.

1. Datadog simplifies and facilitates increasingly complex work for its customers

Computing platforms have become increasingly difficult to monitor, operate, and continue to function properly, in part due to the large number of different ways businesses use them.

According to the specialist in identity management Okta, businesses with 2,000 or more employees use an average of 175 applications, while small businesses with 1,999 or fewer employees use an average of 73 apps. Some are powered by physical data centers, while others rely on one of different cloud computing services.

Image source: Getty Images.

Datadog helps organizations build a reliable technology infrastructure by detecting, preventing and repairing technology failures faster. It works with all types of technology that businesses can use, collects the information those businesses need to make sure their IT systems stay up and running, and presents that information in a way that the people who run those systems can easily understand. .

2. Datadog’s excellence in product innovation broadens its market opportunity

Constant innovation helps Datadog stand out from the crowd. Once the company built its core infrastructure monitoring platform, it continued to add important features that increasingly cover aspects of monitoring, as shown in this graph from a recent presentation to investors:

A bar graph shows how Datadog has expanded its product offerings over time.

Image source: Datadog results presentation.

In October 2021, Datadog announced 10 new products and additional features. And just last week, the company announced a new product to help detect and protect their users’ sensitive personal data, and avoid breaking regulations designed to protect user privacy.

Creating new products helps Datadog sell more of these offerings to new and existing customers:

Key customer indicators

Sep 30, 2021

Sep 30, 2020

Growth (%)

Total clients

17,500

13,100

34%

Customers generating over $ 100,000 in annual recurring revenue

1,800

1,082

66%

Use 2 or more products

77%

71%

11%

Use 4 or more products

31%

20%

15%

Source: Company earnings releases and transcripts.

The company also said its net dollar retention rate – how much more the average existing customer spends year over year – exceeded 130% for the 17th quarter in a row. Generally, a net retention rate greater than 120% is considered excellent. This growing popularity is helping Datadog increase its total addressable market opportunity from about $ 38 billion in 2021 to $ 53 billion in 2025, a 40% jump.

Once customers start using Datadog, it becomes very difficult for them to get by. It takes time, effort and expense for businesses to adopt its platform, let alone replace it with a competing product. And in many cases, no competitor can easily meet all of the customer needs that Datadog can; switching would force customers to adopt several other solutions. This one-stop-shop simplicity helps Datadog keep rivals at bay.

Datadog has built a resilient and scalable business model

The company’s third quarter results underscore the scalability and effectiveness of Datadog’s business model. Datadog’s third-quarter revenue grew 75% year-on-year to $ 270 million, from 67% year-on-year growth in the second quarter and 51% in the first quarter, suggesting that Datadog’s activities are gaining momentum.

Incredibly, the company has achieved this growth on top of its customers’ already higher spending on digital transformation fueled by COVID-19 in 2020. It’s impressive for any business, but especially rare for a business. whose annual recurring revenues exceed $ 1 billion. Datadog was able to achieve this high growth while spending less on sales and marketing as a percentage of revenue, down from 37% a year ago to 28% in the third quarter of 2021.

Additionally, the company reduced its third-quarter net loss from $ 15 million a year ago to $ 5.5 million, or just 2% of its quarterly revenue. Free cash flow, which measures how much money a business has left after paying its crucial bills, nearly doubled to $ 57 million, from $ 29 million a year ago.

In addition, the company is investing more of this money in research and development to continue to dominate product innovation. R&D investments grew nearly 100% in the third quarter of 2020, reaching 41% of revenue and giving Datadog’s series of lucrative new innovations plenty to continue.

Great long-term investment for patient investors

Datadog’s investors have built huge expectations for future growth into its stocks. Any misstep in execution, or even a one-time failure in quarterly results, could send prices plunging in the short term. Additionally, while Datadog has established a solid lead in the race for surveillance and observability, competitors will not stand still. It is important to keep a close eye on competitors such as New Relic, Dynatrace, Elastic, and Splunk, and continue to examine if and how they can challenge Datadog’s strong position.

Its customer-centric approach and culture of innovation enables Datadog to deliver solutions that its competitors cannot touch. Investors interested in long-term cloud computing should consider a small position as part of a diversified portfolio. If the company can continue to perform exceptionally well, it could be a big winner in the long run.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.


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