Datadog: The Price Is Still Eye-Popping

seekingalpha2021-05-20

Summary Relative to other software stocks, Datadog is doing relatively better, losing "only" 8% of its value year-to-date. Enthusiasm for the company has picked up in May after a strong beat-and-...

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Lim89
2021-05-20
Lim89
Buy more
0421catcat
2021-05-20
0421catcat
Good ?

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While the list of tech stocks that crashed ~50% or more from all-time highs is long (Palantir (PLTR), Sumo Logic (SUMO), Snowflake (SNOW), Fastly (FSLY) - the list goes on and on, but these are some of the more notable recent drops), some like Datadog (DDOG) have been able to retain investors' goodwill.\nYear to date, shares of Datadog are down \"only\" 8%, and down just shy of 30% relative to all-time highs near $120. Valuation concerns have rocked Datadog at the top, but recently in May after a superb Q1 earnings beat-and-raise, Datadog has started rebounding again.\nData byYCharts\nNow, investors should be asking themselves: will Datadog make a full recovery to $120, or will it continue to trade choppily? While the jagged line patterns in Datadog's recent stock charts make for excellent short-term trading opportunities,my outlook on Datadog remains a cautious one.\nFirst, I'll share the relevant good news: Datadog has dramatically boosted its outlook for 2021, after a strong earnings topper in Q1. Now, the company is guiding to $880-$890 million in revenue, representing a 46-47% y/y growth pace. This is substantially higher than the company's original FY21 outlook of $825-$835 million, which would have represented roughly ten points weaker growth (37-38% y/y).\nFigure 1. Datadog FY21 outlook\nSource: Datadog Q1 earnings release\nI'd expect as we move throughout the year for Datadog to gradually tweak this forecast upward, though considering the company saw 51% y/y growth in Q1 and it didn't really have substantially easier comps during the pandemic period last year, there's likely not too much additional opportunity on top of the existing outlook.\nMy concern, however, is that this strength is already baked into Datadog's current valuation. At current share prices near $84, Datadog trades at a market cap of $26.17 billion. After we net off the $1.55 billion of cash and $0.73 billion of debt on Datadog's most recent balance sheet, the company's resulting enterprise value is $25.35 billion.\nVersus the $885 million midpoint of Datadog's new revenue guidance range for the year, the stock is at a whopping 28.6x EV/FY21 revenue multiple.That instantly puts Datadog in the highest echelon of software company valuations, surpassed only by a few other names (Snowflake (SNOW) ~55x forward revenue, Zscaler(NASDAQ:ZS)at ~34x forward revenue). We note as well that another Datadog peer with a similar growth profile, Palantir (PLTR), also grew at a 49% y/y pace (only two points slower than Datadog in Q1). Palantir is already expensive, but it's three turns cheaper than Datadog at ~25x forward revenue.\nThe net of it:while I agree that Datadog is a fantastic, fast-growing software company, I view valuation as its biggest vulnerability. And while Datadog is a best-in-breed vendor that consistently wins recognition from Gartner (the leading software industry reviewer), there are also plenty of older \"legacy\" companies that are making huge efforts to catch up and reassert their dominance in the monitoring/log space (Splunk (SPLK), New Relic (NEWR) fall into this bucket). My approach on Datadog is to remain on the sidelines until we get a more meaningful price decline.\nQ1 download\nLet's now cover Datadog's latest first-quarter results in greater detail. The Q1 earnings summary is shown below:\nFigure 2. Datadog Q1 results\nSource: Datadog Q1 earnings release\nDatadog's revenue grew at a 51% y/y pace to $198.5 million in the quarter, beating Wall Street's expectations of $186.6 million (+42% y/y) by a nine-point margin. At this point, investors should have already been accustomed to the fact that Datadog likes to set its early bar very low so it can produce the \"beat and raise\" that it did this quarter. We note, however, that Datadog's revenue did decelerate five points from 56% y/y growth in Q4; and if we are to believe the company's new guidance range for 46-47% y/y growth for the full year, growth will continue to decelerate throughout the remainder of this year.\nOne tailwind that has been on Datadog's side is that it prices its products primarily on a usage basis. For its core log management products, for example, Datadog's base pricing starts at $0.10 per GB of data scanned. This means that over time, Datadog's customer base will ramp up their usage of the platform and increase their spend. The amount of Datadog customers spending more than >$100k in ARR on the platform has increased to 1,437 customers, up 50% from 960 in the year-ago quarter. This is a testament to the success of Datadog's land-and-expand strategy.\nHere's some additional qualitative context from CEO Olivier Pomel's prepared remarks on the Q1 earnings call around Datadog's recent go-to-market and customer trends:\n\n First, usage growth from existing customers was stronger than expected and above historical levels. Among other factors, we are seeing the benefit of new logos signed in the back half of last year as they grow into their commitment.\n\n\n Second, new logo ARR was strong in what is normally a seasonally slower quarter. Showing our go-to-market investments are paying off. And third, churn continues to remain very low and in line with historical rates. Taking all these factors into account, we had a very strong quarter of ARR added. In fact, we hit an important milestone, as we added over $100 million of ARR in a single quarter for the first time.\n\n\n Next, our platform strategy continues to resonate and win in the market. As of the end of Q1, 75% of customers are using two or more products, which is up from 63% last year. Additionally, 25% of customers are using four or more products, which is up from only 12% a year ago. And we also have hundreds of customers using six or more of our nine generally available products. But it's still early. We think this is an interesting proof point that shows the continued sell opportunity in our customer base.\"\n\nPomel additionally noted that picking up the pace of sales and marketing hires is a priority for Datadog in 2021, and also that recently-hired sales reps are ramping quickly.\nOne disappointment in the quarter, however, was the fact that Datadog's gross margin profile took a hit. Pro forma gross margins declined three points to 77%, down from 80% in the year-ago quarter - still a high gross margin profile, but we'd expect Datadog to continue achieving economies of scale especially as it approaches a >$1 billion annual revenue run rate. The company chalked up the gross margin declines to \"continued investments in product and platform innovation,\" per CFO David Obstler.\nFigure 3. Datadog gross margin trends\nSource: Datadog Q1 earnings release\nManagement additionally notes that it expects gross margins to continue a slight decline through the rest of the year as Datadog brings new datacenters online.\nPro forma operating margins, similarly, declined by two points to positive 10% (down from 12% in the year-ago quarter), driven by the gross margin declines plus the ramp in sales hiring. We do note, on the bright side, that with a 10% pro forma operating margin on top of 51% growth, Datadog's \"Rule of 40\" score of 61 still ranks very favorably among other software peers.\nKey takeaways\nDatadog remains more or less the same kind of investment as it has always been: high quality for a high price. Yet I'm very cautious that at the company's current valuation multiple at just under <30x forward revenue that Datadog is one of the stocks most vulnerable to a continued correction/multiples de-valuation in the software sector. Watch and wait here, and don't overweight your exposure to this stock and other expensive names like it.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[{"id":130084926,"gmtCreate":1621496012765,"gmtModify":1704358558715,"author":{"id":"3527303552443900","authorId":"3527303552443900","name":"Lim89","avatar":"https://static.tigerbbs.com/f21e4020ff962f4d66f99662b584ec1c","vip":1,"crmLevel":2,"crmLevelSwitch":0,"idStr":"3527303552443900","authorIdStr":"3527303552443900"},"htmlText":"Buy more","listText":"Buy more","text":"Buy more","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/130084926","repostId":1176216380,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"},{"id":130018858,"gmtCreate":1621494570574,"gmtModify":1704358539564,"author":{"id":"3581152527558672","authorId":"3581152527558672","name":"0421catcat","avatar":"https://static.laohu8.com/default-avatar.jpg","vip":1,"crmLevel":1,"crmLevelSwitch":0,"idStr":"3581152527558672","authorIdStr":"3581152527558672"},"htmlText":"Good ?","listText":"Good ?","text":"Good ?","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":0,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/130018858","repostId":1176216380,"repostType":4,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":8,"commentSize":2,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.2","shortVersion":"4.29.2","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/1176216380"}