People have a fairly brief reminiscence. So, till all of us get chip implants to stave off the worst results of the approaching singularity, now we have to depend on old school analysis to keep up our historic perspective. For instance, do you know that cloud computing – at the least in some primitive, Stone Age type – has been round since at the least the Sixties? This was earlier than the appearance of minicomputers, not to mention desktop computer systems and laptops, so mainframe computer systems served because the spine of the early tech-bro period. However solely governments and the most important firms (like IBM) may afford to purchase and function these monster machines, in accordance with a historical past of cloud computing from TechTarget.
A man named John McCarthy solved the issue by time-sharing through an working system that enabled a number of customers to entry the mainframe concurrently utilizing a dial-up connection. Quick ahead by the rise of Amazon Internet Providers (AWS) and Salesforce with its software-as-a–service (SaaS) enterprise mannequin. As we speak, cloud companies assist enterprises juggle every little thing from hybrid cloud environments to AI workloads and cybersecurity threats – requiring all kinds of ancillary companies to ensure all of those computing elements are operating easily.
That’s the place an organization like Datadog (DDOG) is available in. Based in 2010 throughout the cloud’s so-called “Wild West” part – when companies raced emigrate off-premise with out instruments to handle their sprawling IT infrastructure correctly – Datadog initially turned the go-to dashboard for engineers battling server crashes and latency spikes. The corporate is now thought of the chief in software efficiency monitoring (APM) by providing a collection of instruments that allow clients to regulate how nicely their software program functions are working. Its 2024 outcomes, launched simply days in the past, reveal a agency now not content material to merely monitor clouds however to orchestrate them by increasing into areas like cybersecurity and AI-driven insights with one unified platform.
Is Datadog taking up greater than it will possibly chew or is the corporate able to take an even bigger chew of the cloud pie?
Datadog is Nonetheless a Prime Canine in Income Development
Let’s begin with some numbers from the 2024 earnings name. Datadog reported $738 million in This fall-2024 income (up 25% year-over-year) and practically $2.7 billion for the total yr (up 26%). Whereas we love the continued robust double-digit development, we additionally acknowledge that the upward income trajectory is slowly decelerating because the enterprise matures. Count on extra of the identical in 2025: Datadog initiatives full-year income of about $3.2 billion, a rise of “simply” 18% to 19%. Traders reacted to this horrific information as they normally do by sending shares of Datadog inventory down about 8.5%.
Nonetheless, Datadog’s income development stays pretty spectacular, notably given its scale and present market penetration. The corporate now serves 30,000 clients, up from 27,300 in 2023, with bigger shoppers driving a lot of its development. Clients producing greater than $100,000 in annual recurring income (ARR) was up 13% from a yr in the past, whereas these contributing $1 million-plus ARR jumped 17%. These bigger shoppers – together with 45% of Fortune 500 firms – account for 88% of complete ARR, highlighting Datadog’s deepening relationships with enterprises over mom-and-pop (i.e., small-and-medium-sized) companies.
One other key strategy to measure the well being of a SaaS-based enterprise is the stickiness of the platform. The story is combined right here as nicely. Greater than 80% of shoppers use two or extra merchandise, half use 4 or extra Datadog widgets, and 12% make use of eight or extra. Nonetheless, the final time we checked in with the corporate, Datadog mentioned its internet retention fee, or its potential to upsell and cross-sell options, was “larger than 120%” with out entering into a lot element. Administration reported that the trailing 12-month internet income retention share was in “the excessive 110s” in This fall-2024 (a slight bump from the “mid-110s” the earlier quarter). The gross retention fee seems steady at mid- to excessive 90s.
Datadog Studying New AI Tips
Once more, none of that is shocking. The identical tendencies are rising amongst different widespread SaaS shares, from Crowdstrike to Snowflake, as super-charged income development simply earlier than and throughout the early years of the pandemic has given strategy to respectable and recurring double-digit efficiency. There is no such thing as a purpose to assume that Datadog and these different SaaS firms received’t proceed to develop at a fairly speedy clip, given the dimensions of the cloud companies market.
Probably the most profitable ones will doubtless be these that may broaden their platform portfolios as rapidly and seamlessly as attainable. For CrowdStrike, continued relevance consists of constructing out an end-to-end cloud cybersecurity service. For Snowflake, future development hinges on turning into an AI information cloud firm. And Datadog’s technique entails promoting new cloud-adjacent merchandise in areas like cybersecurity and AI analytics, which would seem to place it on a collision course with firms like Snowflake and CrowdStrike. For example, greater than 7,000 clients now use at the least one Datadog cloud safety product. Despite the fact that they strategy cybersecurity in a different way, Datadog and CrowdStrike are actually oblique opponents.
Regardless of its lofty ambitions, Datadog’s core power stays its unified observability platform, which integrates infrastructure monitoring, log administration, and APM. Collectively, these merchandise symbolize about $2.75 billion in ARR:
Infrastructure monitoring: $1.25 billion
Log administration: $750 million
APM: $750 million
About $200 million (about 7% of complete income) now comes from merchandise outdoors of three core pillars, equivalent to Giant Language Mannequin (LLM) Observability, a elaborate strategy to say that the platform permits clients to watch AI mannequin efficiency. In reality, AI firms represented 6% of This fall-2024 ARR – double from a yr in the past – with about 3,500 clients utilizing a number of Datadog AI integrations together with instruments for monitoring generative AI. As AI workloads develop into extra complicated, instruments like LLM Observability forestall points like mannequin drift, hallucinations, and the annihilation of the human race. Nonetheless, Datadog CEO and co-founder Olivier Pomel cautioned that GPU-driven cloud development hasn’t instantly benefited Datadog but, particularly since hyperscalers like AWS and Microsoft Azure bundle fundamental monitoring with cloud companies.
Time to Add Shares of Datadog Inventory?
Shares of Datadog could also be down 20% year-to-date resulting in “purchase the dip” mantras, however tenured buyers acknowledge that actual “dips” are when there may be blood within the streets. When you’re wanting so as to add shares of a inventory, use valuation benchmarks, not “dips” or arbitrary share worth numbers. As long-time Nanalyze readers know, we developed a easy valuation ratio (SVR) to offer us a quick-and-dirty strategy to consider if a high-growth tech inventory we like is priced to purchase. The ratio divides the market cap by annualized revenues. We examine the consequence with our Nanalyze Disruptive Tech Inventory catalog common and consider a premium related to SaaS shares like Datadog and Snowflake.
Presently, Datadog’s SVR is about 13 ($38.8 billion market cap/$2.95 billion in annualized income), a bit of greater than twice the catalog common and near our earlier purchase goal of 12. That focus on was based mostly on the beneath chart taken from simply over two years in the past after we first entered into our place.
Since then, the common valuation of Datadog has elevated – the common is about 16 over the previous rolling yr (SVR averages will be discovered for a lot of shares in our Tech Inventory catalog). Which means the present SVR represents a significant sufficient low cost to the common that including shares is smart, particularly when you think about that they’re beginning to generate some respectable free money circulation now.
The Rule of 40
Whereas we frequently focus closely on income development, not all revenues are created equal. Firms with robust gross margins stand out as a result of that demonstrates the potential for future profitability (something 80% or above is spectacular and anticipated for a top quality software program firm). Datadog’s gross margin within the low 80s means they’ll begin reigning in prices to understand optimistic working money flows, and certainly they’re.
The above desk exhibits us numerous working price margins for classes equivalent to R&D, “Gross sales and Advertising,” and “Normal and Administrative.” As these margins drop, the general working margin will increase, which produces free money circulation. We will then add the annual income development (row two) to the free money circulation margin (row eight) and that’s the outdated “Rule of 40.” Firms the place this metric exceeds “40” present that they’re capable of handle each development and profitability, and Datadog is managing fairly nicely in that respect.
Conclusion
Datadog’s forward-looking technique revolves round increasing its function because the central nervous system for cloud operations, combining observability, safety, and AI-driven insights right into a unified platform. Report gross sales bookings of greater than $1 billion in This fall-2024 counsel clients are very within the platform however flipping that quantity into actual income will take money and time, and the problem is to scale back prices whereas sustaining development. At an SVR of 13 (about twice our catalog common), Datadog enjoys a premium valuation, however it appears deserved given their robust development and money circulation technology as they work to manage bills. If we glance so as to add shares to our place, Nanalyze Premium subscribers can be first to know.
