Market gyrations have discounted this cloud-monitoring stock to an even better buyable level.
Datadog, Inc. (DDOG)
From Cabot Stock of the Week
Some of the best stock performers throughout history have been what are known as “follow-on” opportunities—companies that thrive as a secondary effect of some major change going on in the world. A classic example was hotels; when flying became commonplace decades ago for both leisure and business, there was a need for places to stay. Voila! Hotels began to be built up all over the place, launching some of the biggest, well-known chains that are still around to this day.
It’s a similar (but more complicated) story with Datadog. The catalyst was cloud computing; as companies have moved to the cloud, it’s allowed them to build all sorts of custom apps for their operations. That’s been a great thing, but it’s presented a new challenge: how to monitor all of them, not only to make sure that they’re working as designed but also whether they’re working with each other. More important still, tracing specific events that could hinder performance and gaining general insight on how the apps are being used (and hence, how they could be improved).
Broadly speaking, this sector is known as infrastructure monitoring and application performance management, and Datadog has one of the top platforms to address these issues. And the market is huge and growing—basically, every piece of cloud infrastructure has to be constantly monitored, so as firms get rid of on-premise setups, demand for Datadog’s offerings only increases.
Of course, unless you’re a tech aficionado, the details of the company’s platform can give you the proverbial ice cream headache. Some of the things it can provide include auto-generated service overviews of app performance, graphical error rates, and latency reports, automatically collected logs from a variety of sources, alerts on any performance issues (including testing user journeys and experiences online), visual reports on load times and frontend errors, traffic flow monitoring, new code problem detection and a variety of real-time interactive dashboards.
As investors, what counts more than the nitty-gritty is that the solution is (a) regarded as best-in-class, especially for infrastructure monitoring, and (b) is very well rounded, offering clients more of a one-stop shopping destination, which is becoming more attractive as clients are moving huge amounts of technology to the cloud.
Sure to help the cause is a recent partnership with Microsoft; Datadog’s services are now available as a so-called first-class service on that firm’s Azure cloud platform, basically making it easy for all of Azure’s customers to use Datadog. It’s likely to attract many new customers, and it’s also a perception-changer, as it’s the first third-party vendor to be integrated into one of the huge public cloud providers.
Not that Datadog was thirsty for growth—revenues had been booming for many quarters (even the slowdown in Q2 saw 68% revenue growth), earnings are in the black (six cents and five cents per share in the past two quarters) and the sub-metrics have been very impressive. In fact, Datadog has now had a same-customer growth rate above 30% for 12 straight quarters (!) as clients expand their usage, mainly due to the company continually expanding its offerings (68% of clients are now using at least two products vs. just 40% a year ago).
Analysts see growth slowing some going forward (revenues up “only” 35% in 2021), though we tend to think that will prove very conservative, especially as the pandemic drives everything online and the Microsoft deal helps attract new customers. The firm’s next quarterly report is likely out in early November.
As for the stock, it exploded out of a base in early May and basically doubled in just a few weeks. The 11-week rest that followed was normal given that advance, and the Azure deal prompted a massive-volume breakout near the end of September. We think DDOG is a decent buy around here. BUY.
Timothy Lutts, Cabot Stock of the Week, 978-745-5532, cabotwealth.com, October 19, 2020