data dog is a hyper growth stock that has smashed the market's return since it came public however
this former wall street dolling is down more than 50% from its 52-week high is this a broken
company or is this just a broken stock here's why we think it's the latter and we're happy
to add shares to our portfolio today my name is brian ferali and my name is brian stouffel
thanks to commonstock for sponsoring today's video as of the time of this recording both brian and
i are already shareholders of datadog the brian despite being down 50% from its highs datadog is
still worth $28 billion today davedog's mission is to break down silos and fight complexity for our
customers this isn't my favorite mission statement in the world however i think that this company is
on a mission i agree brian and if you know the founding story it makes more sense this is a
software as a service company that was founded by two people one who was in development the other in
operations and they realized that their teams weren't able to talk together that's what led
them to their first product a real-time unified data platform and since then they've been rolling
out more products to break down those silos datadog solutions have been resonating with the
market for many years and the company now accounts nearly 20,000 customers in total on its platform
while that customer count is impressive if you look at the large customer it looks even better
with over 2,200 that are paying a hundred thousand dollars per year to date a dog what's more the
number of customers that are going to spend at least one million dollars on datadog's platform
in the most recent year recently doubled to more than 216. so what is datadog's business model well
this is a software as a service business for that reason a key metric for investors to watch is the
dollar based net remedy retention rate here data doc shines with a rate that's over 130% in the
most recent quarter putting it in rare company for a fast-growing software company datadog's
customer acquisition costs are actually relatively low only eating up about 35% of gross profit its
demand is robust and nearly all of its revenue is recurring so does datadog have a moat we think the
answer is yes first let's talk about the network effect we think that datadog has a low benefit
for the network effect once a company starts using datadog the rest of the company is incentivized to
also be on datadog to communicate with each other however we don't think this benefit extends beyond
an individual customer so we give this score a very low or weak rating the key mode comes
in the form of high switching costs and if we look at how many products companies have adopted
we can see that play out over the last three years the number of data dog customers using
at least two of datadog solutions has grown at a 50% clip the number of customers that have adopted
at least four of the company's tools has grown to almost 7 000 in the most recent quarter the
number of customers using at least six tools that datadog offers wasn't even offered up two years
ago but it nearly quadrupled in the past year beyond that given this company's size and rapid
growth we think there's an argument to me that the name datadog does have some relevance within the
it community we also think it's worth mentioning that datadog has some counter positioning benefits
that's because there are a few companies out there trying to solve this problem for the development
operations security and even business teams within a company and when you consider that the number
of tools that are adopted by its customers and the rapid growth in the total customer account
we believe that there is ample reason to believe that this company's moat is expanding now over the
last 12 months we've seen revenue growth continue to edge higher growing at a 73 clip with gap gross
margins nearing 80 percent and a gap net income benefit for the first time the rest of the
company's financials are also in really good shape free cash flow growth has been positive for years
and is growing very rapidly the balance sheet has far more cash than it does debt and liabilities
and the returns on capital recently crossed into the positive territory and are likely to
expand from here now as we mentioned datadog was founded when olivier pommel and alexis lacroix
were working at an ed tech company and they were in different divisions they built their products
so that their teams could communicate better together they're both still on board with olivier
functioning as ceo employees give the ceo very high ratings here and insiders of this business
collectively owed more than 15% percent of the company which makes them multi-billionaires on
paper when it comes optionality it's hard to find a company that's done a better job at creating
products that customers gobble up as soon as they hit the market they've moved from development
to operations to security and business solutions moreover there's also ample reason to believe that
the company's high growth can continue not only is there a lot of pent-up operating leverage in the
business but the addressable market opportunity for the company's tools exceeds $42 billion
of which it's currently captured less than three percent moreover the vast majority of this
company's growth has been organic so far so how's it been as a stock to own well despite being down
50% from all-time highs it is still beating the market and regularly exceeds analyst expectations
unsurprising since this company is still in the rapid growth phase it is not focused on returning
capital to shareholders at all now when we look at risk competition is the main one to focus on
there are smaller players focused on parts of datadog's business like new relic dynatrace
and app dynamics which is part of cisco not to mention the fact that major cloud providers like
amazon microsoft and google also have tools that do similar things to data dog beyond that we don't
see a whole lot of business risk for investors to really have to worry about however the biggest
risk that investors face beyond competition is the valuation which we will cover in just a little bit
now the company has already reported first quarter earnings and they did fantastic growing the top
line by 82 and coming in well ahead of their own and wall street's expectations it was a similar
story on the bottom line with a huge increase in non-gaap earnings per share that both beat
the company's own targets and wall street's on a non-gaap basis gross margins are now above 80%
percent with operating and profit margins above 20% free cash flow continues to grow net income
continues to expand and the balance sheet remains in great shape now while revenue is one of the
best indicators for the company's growth there are two others to watch one is billings that's
contracted revenue to come in the future and that grew a hundred percent year over year remaining
performance obligations or rpo a key metric for investors to watch also had a very strong showing
growing 85 percent to more than 850 million dollars as we mentioned dada dog got its start
by focusing on breaking down the silos between dev and ops teams and has recently moved into security
on the conference call management talked about how they're seeing rapid adoption of their security
offering the application security mining product is datadog's 14th total product which shows just
how much optionality this business has in it looking at the current quarter there was a lot to
like the company believes the top line will grow 62 percent or ahead of wall street's estimates
while non-gaap earnings should grow about 40 again ahead of wall street's estimate it was a similar
story for the full year management expects revenue to grow more than 56 to 1.6 billion dollars and to
show bottom line improvements both of those targets exceeded wall street's estimates so
what are we going to watch moving forward well the first is that multi-product usage number of
customers using two four or six tools second we're going to keep an eye on margins we want to see
operating leverage continue to kick in and drive higher margin improvements over time third we're
going to keep an eye on new offerings data dog has done a great job of rolling out new products
they just came out with their 14th and we want to see them continue to do so and fourth we want to
keep an eye on free cash flow we want to see this number continue to grow at a compounding rate when
we look through this earnings report we couldn't help but think that the moat is definitely
widening and the thesis for investing in datadog is very much on track we recently
ran this company through our investing frameworks and this company did outstanding
on my quality score it got an 88 which is one of the highest scores i've ever seen and on mine it
did equally as well getting a 13 solidly in the anti-fragile category sounds great so far right
what breaks this thesis well the biggest risk that investors are taking out by buying today
is still valuation risk despite falling 50 from its 52-week high shares are currently trading at
26 times sales which is lower than it's been in the last two years but is still high historically
if we look at the company's forward price to earnings ratio not a metric i'm a huge fan of
datadog is trading hands for about 131 times expected earnings that's lower than it has been
in the past but is in no world considered cheap probably the best metric to drive this company's
value is the price to free cash flow ratio while it's currently at 93 which is a very high figure
this is also at a multi-year low still in no world can you call that number cheap despite all of that
we're huge fans of this company and we're going to be adding shares to our portfolio that we keep
over on common stock you can follow along with our portfolio anytime by clicking the
link in the video description and shows you all the stocks that we've purchased so far
we want to give a special shout out to benjamin buchanan benjamin headed over to common stock
after we made our video about paypal we thought that benjamin's comments about a weakness that we
might have missed were the most insightful offered and because of that common stock sent benjamin two
hundred and fifty dollars we'll be doing the same with this video so if you think there's something
we're overlooking about our thesis and data dog please let us know and you could also win 250
for doing so so there you have it we think dieta dog is a very high quality business that is an
attractive candidate today although of course we could be wrong still we'll be playing 250 of our
own money and adding this company to our portfolio today please let us know what you think of this
video and give it the thumbs up if you think it deserves it see you next time brian's out