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Datadog (NASDAQ:DDOG) Reports Upbeat Q2, Stock Soars


Full Report / August 25, 2021
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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.

Datadog (DDOG) Q2 FY2021 Highlights:

  • Revenue: $233.5 million vs analyst estimates of $212.4 million (9.93% beat)
  • EPS (non-GAAP): $0.09 vs analyst estimates of $0.03 ($0.06 beat)
  • Revenue guidance for Q3 2021 is $247 million at the midpoint, above analyst estimates of $226 million
  • The company lifted revenue guidance for the full year, from $885 million to $941 million at the midpoint, a 6.32% increase
  • Free cash flow of $42.2 million, roughly flat from previous quarter
  • Customers: 1,610 customers paying more than $100,000 annually
  • Gross Margin (GAAP): 75.5%, down from 76.4% previous quarter


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.

Applications and infrastructure are getting more complex, and engineers need to know what is happening inside the cloud systems so they can spot problems before they happen and troubleshoot when they happen. That drives demand for monitoring services like Datadog, and as cloud adoption and standards for reliability of internet services grow, that demand is likely to also grow hand in hand.

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 exceptional over the last year, growing from quarterly revenue of $140 million, to $233.5 million.

Datadog Total Revenue

This was another standout quarter with the revenue up a splendid 66.8% year on year. On top of that, revenue increased $35 million quarter on quarter, a very strong improvement on the $21 million increase in Q1 2021, and a sign of acceleration of growth, which is very nice to see indeed.

Analysts covering the company are expecting the revenues to grow 36.5% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Large Customers Growth

You can see below that at the end of the quarter Datadog reported 1,610 enterprise customers paying more than $100,000 annually, an increase of 173 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

Profitability

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, licences, technical support and other necessary running expenses was at 75.5% in Q2.

Datadog Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.75 left to spend on developing new products, marketing & sales and the general administrative overhead. Despite it going down over the last year, this is still 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 Q2 Results

With market capitalisation of $35.4 billion, more than $1.41 billion in cash and with free cash flow over the last twelve months being positive, the company is in a very strong position to invest in growth.

We were impressed by how strongly Datadog outperformed analysts’ revenue expectations this quarter. And we were also excited to see the really strong revenue growth. On the other hand, there was a deterioration in gross margin. Zooming out, we think this was a great quarter and we have no doubt shareholders will feel excited about the results. The company is up 6.35% on the results and currently trades at $121.7 per share.

Is Now The Time?

When considering Datadog, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. There is 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 34.1x indicates that the market is definitely optimistic about its growth prospects. And looking at the tech landscape today, Datadog's qualities stand out, we think that the multiple is justified and we still like it at this price.