Datadog ($DDOG) – Product, Competitive Analysis & Financial Deep Dive

In this post, we’re going to talk about Datadog – the stock that has been in the eyes of many retail investors and hedge funds but has been an underperformer in the last many months. We will study what the company does, the importance of what they do, competitors and analyse their financials and management outlook to give us a better idea of what the stock and more importantly, the company’s future holds.

First Up, What Is Datadog?

Datadog is a cloud-based monitoring and analytics platform that provides developers and IT operations teams with real-time visibility into the performance of their applications, infrastructure, and networks. The platform collects and organizes data from a wide range of applications, servers, containers, databases, and cloud services to provide a unified view of an organization’s entire IT environment.

Why Is Datadog An Important Product?

1. It helps IT teams monitor the reliability and performance (metrics such as uptime, page loading time/speed) of their applications and infrastructure in real-time, set up alerts and notifications and gain insights into usage patterns and trends. This data can be used to identify areas of optimization, cost savings and improvement of service performance which were previously not easily achievable due to unavailability of a solution which aggregates data from hundreds of daily used platforms in one place.

2. It helps users find, prioritize and fix application security threats with automated recommendations on infrastructure misconfigurations.

3. It detects infrastructural issues before key deployments, evaluate post-launch bottlenecks, errors and rollback if needed.

In summary, Datadog’s key selling points are that it helps teams save costs from both their IT infrastructure and from the time saved by their highly paid tech teams. It also improves overall product quality, security and performance by preventing issues that lead to a poor user experience and impact business metrics.

Primary Users

Datadog’s primary users are software developers, engineering managers, IT & DevOps teams who are responsible for monitoring and maintaining the performance, availability, and security of an organization’s IT infrastructure, servers & applications. In addition to IT and DevOps teams, Datadog’s platform is also used by security teams to monitor potential threats and vulnerabilities across an organization’s technology stack.

Key Competitors & Competitive Advantage

Datadog’s main competitors include other monitoring and observability platforms such as Dynatrace, Splunk, New Relic, and AppDynamics. All of these companies are publicly listed (check out financial comparison below).

Compared to Dynatrace: Dynatrace claims that the way it differentiates is in its ability to provide AI enabled answers rather than manually going through charts, metrics and alerts which is the case for Datadog. From our analysis of Datadog, Dynatrace is right as Datadog does not mention its use of AI or automated recommendations for customers and this is a big differentiator which they would need to work towards in order to improve their product positioning especially given the rapidly growing demand for AI based software from enterprises.

Compared to Splunk: First up, it is important to mention that Splunk does a lot more apart from infrastructure & service monitoring – for example, they have a large scale data analytics platform that many companies use to discover operational issues. Thus, they are not a pure-play competitor. Datadog has a lot more integrations (600+) for infrastructure monitoring compared to Splunk’s ~250-300. This expands Datadog’s coverage and gives them a leg up.

Compared to New Relic: New Relic has a leg up over Datadog in the areas of AI based recommendations and much higher quality UI & UX whereas Datadog scores better if we look at their data querying, visualization & IT performance monitoring capabilities.

Compared to Appdynamics: Like the name suggests, Appdynamics has been focused more on monitoring applications (Application Performance Monitoring, APM) rather than cloud infrastructure & services and is thus fundamentally a different product. Datadog has tried to enter into this space, but their key proposition still remains managing cloud services / infra rather than applications. Appdynamics was also acquired by Cisco in 2017 which is why we will not be comparing them as a pure-play observability software provider in our financial comparison below.

Financial Comparison
(*as of 25th March, 2023)

As can be seen above, Datadog is the market leader in terms of revenues, market cap and YoY growth rate in revenue. However, what is interesting to note is that Dynatrace is not too far behind. Even though its market cap is almost half of Datadog’s, its P/S valuation is ~20% cheaper, it has posted GAAP positive net profit last year and has even better gross margins than Datadog. As we saw in the competitive analysis, Dynatrace also has a leg up over Datadog in terms of its AI capabilities and its stock price has moved much more favorably in the last 1 month, 6 months and 1 year.

Financial Outlook, Management Commentary

For 2023, management has guided for full year revenues to be in the range of ~$2.08B, which is an increase of ~24% from 2022 revenues. This is a sharp drop in growth rates compared to the 63% growth the company saw in revenues from 2021 to 2022. The lingering macroeconomic pains in the technology industry prove that Datadog also has been impacted and its growth has slowed down drastically.

However, a thing to note is that it is possible Datadog management gave guidance on the lower range which could have a higher scope for outperformance. In 2023, with so many companies looking to cut costs and become more efficient with their infrastructure plus employee expense spending, Datadog could also benefit from the tailwinds and see its growth rates recover towards end-2023 if the tech industry gains some steam and outlook becomes more favorable.

To summarize, Datadog is a healthy, fast growing company with a really good growth rate and a product that is solving a pertinent need of the market. It is also well positioned to capture the growth trends in the cloud industry but investors should have to be wary of recent trends highlighted by management for reducing growth, competitors such as Dynatrace catching up and rich valuations which might dampen future returns.

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