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Thesis Article
Datadog is a leading data infrastructure management and security platform for cloud applications. We cover the company’s business more deeply than ours previous articleand will not put details here because this article is primarily focused on The risks and opportunities of Datadog within the current market environment.
Datadog’s (NASDAQ: DDOG) the stock has performed surprisingly well over the past year compared to the overall tech and cloud sector which has seen the company’s stocks lose amid tightening Fed monetary policy and high inflation.
You can see the relative performance of Datadog when compared to one of the flagship technology ETFs, the WisdomTree Cloud Computing ETF (WCLD), where Datadog itself is a key position.
Much of that relative excess performance can be attributed to Datadog’s very good growth along with strong gross profit margins and free cash-flow generation. While many of the companies that are also part of the top ETF have the same strong gross profit margins, for example Workday (WDAY), ServiceNow (NOW), Snowflake (SNOW), or Salesforce (CRM) it is clear that the Datadog positions itself in the top category.
Overall, Datadog ranked highest in terms of gross profit margins and second highest in revenue growth and the company still achieved a positive GAAP operating margin for the most recent quarter (see finance section below).
If you look at the relative performance of Datadog’s stock within that peer-group, it’s clear that the selling pressure on the stock is somewhat muted compared to other companies. While Datadog’s strong business fundamentals and growth outlook may explain most of the relative excessive performance in retrospect, we believe the shares may have more room to correct within the current market environment in which the Fed is keen to implement multiple rate increases in the future, and the fear of recession on the horizon.
The question really is: what will happen to the Fed that is expected to implement aggressive rate increases? Will tech investors stick to high-quality but high-value names like Datadog or will they move their investments elsewhere?
Let’s take a look at Datadog’s latest business performance and guide to understand where the company is heading.
Q4 at FY2021 Download
Datadog reported strong fourth quarter and full-year (FY) 2021 results with industry-leading revenue growth while reaching operating profitability for the fourth quarter along with continued strong operations and free cash-flow generation. .
Financial Highlights of the Fourth Quarter 2021
- Revenue was $ 326.2 million, an increase of 84% year-over-year.
- GAAP operating income was $ 8.5 million; The GAAP operating margin is 3%.
- Non-GAAP operating income was $ 70.6 million; non-GAAP operating margin is 22%.
- GAAP net income per diluted portion is $ 0.02; non-GAAP net income per diluted portion is $ 0.20.
- Operating cash flow was $ 115.8 million, with free cash flow of $ 106.7 million.
- Cash, cash equivalents, restricted cash, and marketable securities were $ 1.6 billion as of December 31, 2021.
Financial Highlights for Fiscal Year 2021
- Revenue was $ 1.03 billion, a 70% year-over-year increase.
- The GAAP operating loss was $ 19.2 million; The GAAP operating margin is (2)%.
- Non-GAAP operating income was $ 165.1 million; non-GAAP operating margin is 16%.
- The net GAAP loss per diluted component is $ (0.07); non-GAAP net income per diluted portion is $ 0.48.
- Operating cash flow was $ 286.5 million, with a free cash flow of $ 250.5 million.
Management showed strong confidence during the conference call and emphasized the strong metric of customer growth along with its ability to generate substantial free cash-flow:
We are very pleased with our performance in Q4, where we showed high growth in size, as well as strong business efficiency. Looking back on 2021, not only do we continue to see a very strong demand environment, we also continue to change at a rapid pace. And our team has done very well to help our customers manage complexity during COVID. (…)
We had approximately 18,800 customers from approximately 14,200 at the end of last year. We ended the quarter with approximately 2,010 customers with ARRs of $ 100,000 or more, up from 1,228 at the end of last year. These customers generated approximately 83% of our ARR. We have 216 customers with ARRs of $ 1 million or more, which is more than double the 101 we had at the end of last year.
The strength and efficiency of our business model comes with $ 107 million in free cash. And our dollar -based net retention rates continue to exceed 130% as customers increase our usage and adopt our newer products.
At a high level, positive business trends from recent quarters, continued into Q4. Business growth from current customers exceeded our expectations this quarter, and we saw strong growth in all products on our platform across all business segments.
Not surprisingly, Datadog provides strong guidance for the current year.
First Quarter 2022 Outlook
- Revenue between $ 334 million and $ 339 million.
- Non-GAAP operating income between $ 36 million and $ 41 million.
- Non-GAAP net income per share is between $ 0.10 and $ 0.12, assuming approximately 348 million weighted average diluted shares are unpaid.
Fiscal Year 2022 Outlook
- Revenue between $ 1.51 billion and $ 1.53 billion, indicating 48% YoY growth compared to FY 2021
- Non-GAAP operating income between $ 160 million and $ 180 million.
- Non-GAAP net income per share is between $ 0.45 and $ 0.51, assuming approximately 350 million weighted average diluted portion is unpaid.
This strong forecast is a testament to Datadog’s industry -leading and expanding product portfolio of TAM.
Expanding TAM and Its Partnership
Datadog continues to expand its business and has made significant efforts to build its partnership network that will ultimately expand its overall addressable market.
Datadog announced the launch of its Cloud Security Offering, which adds a comprehensive security platform to Datadog’s existing surveillance capabilities, allowing organizations to rely on an integrated platform to link security insights to business -wide tracking data. The security platform allows Datadog to cross-sell its new offering to its previous customer base with high strategic fit while data management and security go hand in hand. The global cloud security market is expected to grow from USD 40.8 billion in 2021 to USD 77.5 billion in 2026, at a Compound Annual Growth Rate (CAGR) of 13.7% from 2021 to 2026. This will create a significant additional stream of revenue for moving Datadog forward.
In addition, Datadog also announced important strategic partnerships that will stimulate their future growth:
- they signed an important partnership with Microsoft within the Azure Cloud Adoption Framework, which gives Azure customers access to Datadog’s monitoring and security capabilities to accelerate their cloud adoption.
- announced a global strategic partnership with Amazon Web Services, in which AWS and Datadog will enable tighter future product alignment and integration for their broad customer base, including surveillance solutions Datadog but also the aforementioned full-stack security solutions across all layers of the customer’s cloud environment.
The expanding TAM and built-out new partnerships clearly support Datadog’s bullish thesis. But the big issue remains high stock values.
Appreciation
There is no doubt that Datadog will continue to be a more important player in the cloud applications market. Although Datadog is currently able to outperform many of its competitors in terms of growth, the company needs to maintain such growth rates to justify its relatively high valuation and outperformance compared to the peer group.
The current valuation gap is noticeably visible when looking at the forward PS ratio. Clearly Datadog is a unique company that defines its own industry. However, investors have lost appetite for high-value stocks like Datadog and we believe there may be more room for the bulk to adjust downwards.
While Datadog’s revenues and EPS are expected to continue to grow, even two years later, Datadog carries a high forward PE ratio (especially on a non-GAAP basis), which appears to leave little space for error. It’s worth noting here that the S & P500 average and Nasdaq PE-multiple are currently sitting at 24.90x and 31.15x, respectively. Any unearned earnings in the future are likely to put significant downward pressure on Datadog stock.
Looking for Alpha EPS estimates for Datadog
Conclusion
In our last article on Datadog, we argued that Datadog parts seem to be perfectly priced, and we believe that hasn’t changed. While Datadog is a prime example of a company benefiting from the strong tailwind and secular growth of workloads being moved to the cloud, it’s easy to see in retrospect why the company trades at a high valuation compared to its direct counterpart. However, with the current appreciation and within the current market environment (monetary policy tightening and recession fears), we believe that investor appetite for high-flying tech stocks with high multiples will be limited. . Therefore, Datadog components may have more room to adjust to the downside. At least there is little room for error and any potentially negative news could result in a significant downward movement in the share price and re-rating in multiples of the stock analysis.