Datadog (NASDAQ:DDOG) Delivers Impressive Q3, Stock Soars

Full Report / November 04, 2021
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Cloud monitoring software company Datadog (NASDAQ:DDOG) reported Q3 FY2021 results topping analyst expectations, with revenue up 74.8% year on year to $270.4 million. Guidance for next quarter's revenue was surprisingly good, being $291 million at the midpoint, 10.4% above what analysts were expecting. Datadog made a GAAP loss of $5.48 million, improving on its loss of $15.1 million, in the same quarter last year.

Datadog (DDOG) Q3 FY2021 Highlights:

  • Revenue: $270.4 million vs analyst estimates of $247.8 million (9.14% beat)
  • EPS (non-GAAP): $0.13 vs analyst estimates of $0.06 ($0.07 beat)
  • Revenue guidance for Q4 2021 is $291 million at the midpoint, above analyst estimates of $263.5 million
  • Free cash flow of $57 million, up 34.9% from previous quarter
  • Customers: 1,800 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 76.5%, down from 78% same quarter last year

Named after a database the founders had to painstakingly look after at their previous company, Datadog (NASDAQ:DDOG) is a software as a service platform that makes it easier to monitor cloud infrastructure and applications.

Founded in 2010, Datadog was designed to help companies that were then just starting to move from legacy on-premise servers to hosting their systems in the cloud. Because the rate of deployment of software increased from weeks to days and hours, the engineering teams needed a way to observe their cloud infrastructure in real-time.

Datadog seamlessly integrates into a company’s tech stack and pulls all the metrics that matter for different cloud services and databases and makes them available in a single real-time dashboard. The shared dashboard then makes it easy for different teams in the company to collaborate when investigating why a service broke down or became really slow.

As more workloads and applications move to the cloud, the reliability of the underlying cloud infrastructure becomes ever more critical, and ever more complex. To solve the challenge, companies and their engineering teams have turned to a range of cloud monitoring tools that provide them with visibility to troubleshoot the issues in real time.

Cloud infrastructure monitoring is becoming a competitive space and Datadog is competing with offerings from New Relic (NYSE:NEWR), Elastic (NYSE:ESTC), Splunk (NASDAQ:SPLK), monitoring tools made by the cloud providers themselves and up and coming startups like Better Stack.

Sales Growth

As you can see below, Datadog's revenue growth has been incredible over the last year, growing from quarterly revenue of $154.6 million, to $270.4 million.

Datadog Total Revenue

This was another standout quarter with the revenue up a splendid 74.8% year on year. On top of that, revenue increased $36.9 million quarter on quarter, a solid improvement on the $35 million increase in Q2 2021, and happily, a slight re-acceleration of growth.

Analysts covering the company are expecting the revenues to grow 37.5% over the next twelve months, although estimates are likely to change post earnings.

Large Customers Growth

You can see below that at the end of the quarter Datadog reported 1,800 enterprise customers paying more than $100,000 annually, an increase of 190 on last quarter. That's in line with the number of contracts wins in the last quarter and quite a bit again above what we have typically seen over the last year, confirming the company is sustaining a good pace of sales.

Datadog customers paying more than $100,000 annually


What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Datadog's gross profit margin, an important metric measuring how much money there is left after paying for servers, licenses, technical support and other necessary running expenses was at 76.5% in Q3.

Datadog Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.76 left to spend on developing new products, marketing & sales and the general administrative overhead. Significantly up from the last quarter, this is a good gross margin that allows companies like Datadog to fund large investments in product and sales during periods of rapid growth and be profitable when they reach maturity.

Key Takeaways from Datadog's Q3 Results

Sporting a market capitalization of $50.4 billion, more than $1.46 billion in cash and with positive free cash flow over the last twelve months, we're confident that Datadog has the resources it needs to pursue a high growth business strategy.

We were impressed by the exceptional revenue growth Datadog delivered this quarter. And we were also glad that the revenue guidance for the next quarter exceeded analysts' expectations. Zooming out, we think this impressive quarter should have shareholders feeling very positive. The company is up 9.37% on the results and currently trades at $182.6 per share.

Is Now The Time?

Datadog may have had a good quarter, but investors should also consider its valuation and business qualities, when assessing the investment opportunity. There are a number of reasons why we think Datadog is a great business. While we would expect growth rates to moderate from here, its revenue growth has been exceptional, over the last two years. On top of that, its very efficient customer acquisition hints at the potential for strong profitability, and its bountiful generation of free cash flow empowers it to invest in growth initiatives.

Datadog's price to sales ratio based on the next twelve months of 43.3x indicates that the market is definitely optimistic about its growth prospects. But looking at the tech landscape today, Datadog's qualities stand out and we still like it at this price.

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