We came across a bullish thesis on Datadog (DDOG) on ValueInvestorsClub by differentiatedfractal31415. In this article we will summarize the bulls’ thesis on DDOG. Datadog shares were trading at $120.09 when this thesis was published, vs. closing price of $104.97 on Aug 5.
A close-up of a server running a cloud-native platform, symbolizing the power of the software-as-a-service (SaaS) business area.
Datadog (DDOG) represents a compelling investment opportunity in the software sector, particularly for those with a longer investment horizon. As a leader in observability, Datadog provides a cloud-native, full-stack monitoring and security platform for developers, IT operations, and business users. What makes Datadog unique in its industry is its comprehensive suite of 19 integrated products that offer infrastructure monitoring, log management, application performance monitoring (APM), and cloud security. These products cater to a diverse range of end markets, including small and medium-sized businesses, mid-market companies, and large enterprises. Top clients include notable names like OpenAI and JPMorgan Chase, highlighting Datadog’s relevance across various sectors.
Datadog specializes in observability, providing developers with tools to monitor and analyze the performance of their applications and infrastructure in real-time. This capability ensures optimal performance and addresses potential before they affect users, which is crucial for businesses with mission-critical applications. As cloud services continue to grow, the demand for observability solutions is set to rise, positioning Datadog favorably in a market estimated by Gartner to grow at a 20% CAGR from 2023 to 2027.
Despite the growing need for observability tools, Datadog’s market penetration remains relatively low, with the company serving less than 5% of the estimated 500,000 global accounts. This indicates significant room for growth. Additionally, Datadog’s annual recurring revenue (ARR) has shown robust performance, reaching substantial figures in infrastructure monitoring, log management, and application performance monitoring (APM). The company has demonstrated strong revenue growth, with a reported 27% increase in revenue for the first quarter of 2024 compared to the same period last year. This growth is underpinned by a solid 91% jump in earnings per share (EPS), indicating robust demand for its services. Datadog’s revenue guidance for the current quarter suggests a continued upward trajectory, with expectations set at $622 million, surpassing analyst forecasts.
Datadog’s unified platform offers a comprehensive suite of 19 products, ranging from infrastructure monitoring to security. This integrated approach provides high switching costs for customers, ensuring retention and loyalty. The company’s ability to consolidate vendor services into a single, user-friendly platform has led to high gross revenue retention rates, particularly among enterprises. Datadog has maintained mid-to-high 90s gross revenue retention rates, reflecting the stickiness of its products and the value they provide to customers. This retention is driven by a mix of enterprise customers with 98-99% retention, mid-market with high 90s, and SMBs with mid-90s retention.
The adoption of multiple products by customers has been steadily increasing, indicating strong cross-selling opportunities. In the first quarter of 2024, a significant portion of Datadog’s revenue growth came from customers adopting additional products, reflecting the company’s success in expanding its footprint within existing accounts. For example, the percentage of customers using four or more products increased from 43% to 47%, showing a clear trend of deeper engagement and higher spending per customer.
DDOG is not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 78 hedge fund portfolios held DDOG at the end of the first quarter which was 72 in the previous quarter. While we acknowledge the potential of DDOG as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as DDOG but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
READ NEXT: Analyst Sees a New $25 Billion “Opportunity” for NVIDIA and 10 Best of Breed Stocks to Buy For The Third Quarter of 2024 According to Bank of America.
Disclosure: None. This article is originally published at Insider Monkey.