20 Sep

The Datadog IPO: Will the Optimism Continue?

WRITTEN BY Namrata Sen Chanda

Software-as-a-service (or SaaS) company Datadog (DDOG) made a smashing debut on Wall Street yesterday. After Datadog’s IPO, its shares surged 40% in intraday trading. Datadog offers a SaaS platform that IT companies use to monitor and analyze their technology infrastructure.

The successful Datadog IPO was a fresh lease on life for the markets after WeWorks shelved its IPO earlier this week. Datadog is valued at $10.9 billion, and it raised $648 million in its initial offering by selling 24 million shares.

Bloomberg reported that Cisco Systems (CSCO) offered to acquire Datadog for more than $7 billion shortly before the company went public. Notably, Cisco also bought AppDynamics, Datadog’s competitor, for $3.7 billion in 2017.

There is a lot of investor confidence backing this nine-year-old company. So, what’s driving the optimism for Datadog?

Datadog: Business model

Datadog primarily earns revenue by selling subscriptions to customers for its cloud-based platform. The company stated that it was the first to offer a unique combination of metrics, traces, and logs through its log management solution in 2018. In 2019, the company launched user experience monitoring and announced plans for network performance monitoring.

The company offers quarterly, annual, and monthly subscription terms, but most of Datadog’s customers have yearly plans. Subscriptions for annual plans indicate a more stable revenue stream for the company.

Datadog’s prospectus stated that it primarily targets enterprise customers. In June 2018, the company had 8,846 customers. In December 2018, the company saw a 42% annual increase in its customer base. Ten of its largest customers contributed 14% of its ARR (annual run-rate revenue), and no single customer accounted for more than 5% of its ARR.

Datadog believes in expansion, and it’s already working to enter geographies outside the United States. The company stated that 24% of its revenue comes from outside North America. Datadog indicated that it’s making substantial investments to expand to APAC (Asia-Pacific) and EMEA (Europe, the Middle East, and Africa). Acquiring new customers and creating footprints in other markets is the company’s strategy for growth.

The company reported robust 79% annual revenue growth for the first half of 2019. During this period, Datadog reported a net loss of $13.4 million against a profit of $498,000. In fiscal 2018, it posted a 97% surge in revenue to $1.98 million. Its financial statement revealed that the company is spending aggressively on sales and marketing.

Competitive landscape

One of Datadog’s biggest competitors is Elastic. Its open-source product, Elastic Stack, also provides logging and infrastructure monitoring under an umbrella. Some of the other strong competitors in this space are Dynatrace, New Relic, and AppDynamics, which are established players in the APM (application monitoring tool) product market. Notably, Dynatrace (DT) debuted in August, and the stock climbed 49% on its first trading day.

Datadog stated that big players like IBM, BMC, Microfocus, and Broadcom also offer competing services for on-premise monitoring. Nancy Gohring and Brenon Daly of 451 Research stated, “We view Datadog as strong in cloud-native environments but weaker in more traditional, on-premises monitoring.” They added that as more companies adopt cloud technologies, they may consider newer vendors like Datadog.

The opportunity ahead for Datadog

On March 19, Network Monitoring News reported, “Gartner anticipates that enterprises will quadruple their APM [application performance monitoring] functionality through 2021 to cover the increasing amount of digitized business capabilities. They expect that APM suites will cover 20% of all business applications by this time.”

Datadog estimates its current market opportunity to be approximately $35 billion. Investors are upbeat about Datadog due to its strong financials, as well as the company’s belief in the cloud analytics and monitoring market.

Datadog CEO Olivier Pomel told Forbes, “One thing investors reacted to was the fact that we run a healthy business from a profitability perspective.” Matthew Kennedy of Renaissance Capital echoed this view, noting, “It’s just the latest high growth software company that investors are excited about, and this one just has growth and profitability that few do.”

However, the fear of an imminent recession puts Datadog in a challenging place. Most of the company’s enterprise clients may trim their technology spending during tough times, making it important for a new company like Datadog to be well-prepared to face these market challenges.

A few disappointing IPOs in 2019

Other IPOs that occurred earlier this year were for startups with a high cash burn rate. For example, investors remained skeptical about the future of Uber (UBER), Lyft (LYFT), and the car-sharing industry in general. Lyft stock closed 53% below its listing price on Thursday, while Uber settled 36% below its IPO price.

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