In the first half of 2020, investors scooped up Datadog (DDOG), sending the shares surging 130%, a significant outperformance compared to the Nasdaq Composite’s gain of 12.1%. The company, a provider of a monitoring and analytics platform, is benefiting from rising demand for cloud observability solutions across the enterprise segment.
Since Datadog went public in September 2019 at $27 a share (with an opening trade of $40.35), the company has delivered three stellar quarterly earnings reports, with top-line growth averaging 86%. Last week, the stock traded to a new post-IPO high of $93.
At recent prices, Datadog’s enterprise value is 44 times the 2020 consensus revenue estimate of $563.2 million (representing growth of 55.3%). On the 2021 consensus of $755.3 million (growth of 34.1%), the forward multiple of 33 is still extended.
Investors have favored Datadog because the company is seen as a prime way to play the strong growth trend in the observability market. With more workloads shifting to the cloud and a big increase in complexity across IT departments, organizations are finding that they need to monitor all of their operations more closely—everything from infrastructure and logs to applications. Datadog has emerged as the leading vendor when it comes to cloud observability.
In Q1, Datadog’s total revenue of $131.2 million expanded 87%, accelerating from growth of 84% in the previous quarter. Gross margin of 80% was up from 73% a year ago. Analysts were expecting a loss of a penny a share, but the company reported a profit of six cents. Adjusted billings gained 70%. RPO of $256 million was up 82%.
Less than 10% of Datadog’s annual recurring revenue (ARR) comes from industries negatively impacted by Covid-19. Management said there was no significant Q1 deal slippage, while the pipeline remained robust.
In Q1, Datadog added 1,000 net new customers for the second consecutive quarter. There are now 11,500 total customers, up 40% year over year. Datadog has attracted 960 enterprise customers with ARR of $100,000+, up 89% year over year. About 75% of total ARR comes from the enterprise segment.
The latest dollar-based net retention rate was above 130% for the eleventh quarter in a row, indicating strong follow-on business. About 63% of all Datadog customers have purchased two or more products (up from 40% just three quarters ago), while 75% of all new logos in Q1 landed with two or more products.
Datadog continues to expand its product portfolio. The company’s newest offerings, Network Performance Monitoring and Real User Monitoring, both saw strong uptakes after launching in Q4. The new Security Monitoring solution offers complete visibility across security, developer and operations teams.
Datadog closed some big deals in the latest quarter, including a 7-figure new logo win with a Fortune 100 pharmaceuticals company that embarked on a migration to a container-based hybrid cloud. Datadog was selected because the pharma’s incumbent legacy tools could not keep up with the new dynamic stack. Datadog won a 6-figure new logo transaction with a large health insurer that deployed the observability solutions as part of a multi-cloud migration.
While Datadog management expressed some cautiousness on the Q1 earnings call, saying there may be increased deal slippage in Q2 and Q3, the company still raised its top-line guidance for the year. The updated outlook calls for 2020 revenue of $555 million to $565 million, 3.7% above the previous guide of $535 million to $545 million at the midpoint.
Despite Datadog’s high valuation, a number of institutional investors have been accumulating the stock. In Q1, T. Rowe Price bought 18.1 million shares, boosting its position by 399%. That was on top of the mutual-fund giant’s Q4 purchase of 3.2 million shares. T. Rowe Price is now the #1 Datadog holder, with 22.7 million shares. Fidelity in Q1 added 3.61 million shares, increasing its position by 640% to 4.18 million shares.
Some tech-focused firms were big buyers in the March quarter. After purchasing 2.28 million shares in Q4, Whale Rock Capital more than doubled its position in Q1 to 6.47 million shares, making it the #2 holder. Tiger Global Management boosted its position by 717%, adding 3.2 million shares. Coatue Management bought 2.76 million shares, increasing its position by 550%.