Left Brain Thinking: Datadog

Welcome to Left Brain Thinking, where creative investment ideas meet logical analysis. That's the hallmark of Left Brain Investment Research, where the analysts are looking for growth companies with the potential to double in 2 to 3 years and high-yield bonds with the potential for dramatic price appreciation. Today we're taking a step beyond the cybersecurity stocks we've covered for the last few weeks, and we're doing it with Janice Quek, Senior analyst based in Singapore for Left Brain Investment Research. Janice, great to have you back on Left Brain Thinking.

Good morning, Chuck. It's good to be back on the show.

We are talking today— well, we're taking that step beyond in terms of we're not doing cybersecurity stocks. Not that you guys are done by a far stretch, because anybody who checked out your Fortune Makers series event a week ago, well, they know the whole breadth of cybersecurity stocks, but we're taking it a step further and we're looking at Datadog. It's ticker symbol DDOG. And if the audience goes to leftbrainir.com, they can find the fresh look that you guys recently took on Datadog. This is not a cybersecurity company, but it too is caught up in the whole movement towards everything that's been going on with work from home, expand what you're doing, all that other sort of stuff. How is Datadog being swept into this movement?

That's right, Chuck. We've been covering a series of cybersecurity stocks over the last few weeks on the Left Brain Thinking podcast here, and not far from this theme of monitoring and response software for the enterprise is a company called Datadog. This is a company that provides a platform of solutions to automate the monitoring of IT systems in the enterprise. You know, we hear of the term enterprise digital transformation a lot these days, Companies are modernizing the way they do things and rapidly digitizing work. And this process usually means that they're using more software, digital tools, and applications, and migrating operations to the cloud. You know, believe it or not, the average enterprise has about 464 custom applications deployed today. And 39% of these applications are in the public, private, or hybrid cloud. And as a result, we're increasing our digital footprint quickly, but often an afterthought is the ability to check if this software and the hardware is performing up to speed and if it's safe. Datadog automates this checking and monitoring process, what they call observability, and it provides that visibility in real time so IT teams can identify problems as they occur and respond to them quickly. And they do this for applications monitoring, the network infrastructure, across the technology stack pretty much.

Let's talk about what is called application performance monitoring, which is what Datadog does, why it's so important, particularly as we get towards more of the remote work, you don't have to be in the office kind of setting stuff.

I once saw a McAfee report report titled "Every Company Is a Software Company." And I thought that really succinctly described the level of IT challenges companies are having to manage today because of digital transformation, even if you're not in the tech business. Now, the truth is that many companies have to manage a broad range of IT assets to ensure that everything is running at optimum performance, not just applications. It includes the networks, servers, endpoint devices, and this range of assets will only grow as the company grows. But without the smart software to manage software and automate the observability process I was talking about earlier, IT teams are not able to keep up or spot anomalies and tackle them in time. And these problems can easily snowball and become unmanageable. So companies can also face security breaches and software malfunction that really can compromise time-sensitive operations, which —then all lead to significant costs to the organization. What Datadog offers, the modern infrastructure and application monitoring, is really still in the early stages. So we're only starting to hear of it being deployed in the enterprise. Using a statistic from 2018, it was estimated that only 5% of enterprise applications were being monitored, which if you think about that as an untapped opportunity, this market is huge and growing. It's about a $31 billion opportunity today, and this is projected to grow about 5.5% each year to reach about $37 billion by 2023.

It's not the only company in the space, and obviously all of the technology businesses are particularly competitive. So what makes Datadog stand out from the competition?

You know, we've seen incredibly impressive performance from Datadog. The company is in a hypergrowth phase. Achieving revenue growth rates north of 60+%. And, you know, if you look at the numbers between 2017 and 2019, revenue was increasing at a compound annual growth rate of almost 90%. And if you think about even when comparing with other technology companies, this is a really high number. There are several reasons that has made it successful thus far. One of it is the market opportunity I mentioned earlier and how corporations are really still in the early stages of deploying tools like what Datadog provides. Datadog has said that most of its customers are greenfield, which means that they currently do not use an equivalent product. So the thought process with a lot of these IT teams when they evaluate Datadog is that this is a new capability that will be important for the company. And in fact, it is considered mission critical because in a time when customer-facing operations are digitally run or machines at industrial plant are managed by computers, the financial impact or customer experience impact of downtime can be rather costly. Another reason is that we've seen many of Datadog's customers adopting more products over time. And not only are they starting with one product, then building up their consumption gradually, they're also choosing to purchase more products together in the early stages. And we see this as an indication of product resonance and appeal. IT teams are deciding that more than one or two of Datadog's products in their product suite will be important to the IT workloads now and in the future. And so they're willing to spend. And if we look at its product range, Datadog has a very broad suite of solutions, right? I've mentioned application performance monitoring, network monitoring, security monitoring, user experience monitoring. These are some of the products that they offer in their portfolio. And there's also the part where these solutions are offered on a single platform. Which makes integration, operability, and performance seamless. There's a term that management used before to describe an aspect of their go-to-market, which is frictionless adoption. That's really useful in understanding why they're so successful, because they're making multiple useful products, but they also make it easy for customers to increase consumption with them. At the end of the day, they're really good at what they do. Their solutions have received industry recognition as one of the highest quality in the market available. And these are reputable technology research reviewers like Gartner and Forrester. So the combination of quality and breadth and market opportunity has really helped Datadog grow as rapidly as they have and makes it stand out from the competition.

How does it maintain the growth rates that you require for something to be a stock that you like at Left Brain? There's obviously explosive growth. So when we get through the pandemic, does this company suffer a setback or even any sort of a hiccup?

Chuck, this is an interesting and I'll say important question, right? We've seen how in 2020, how many of the tech companies that have businesses that benefited from the pandemic do really well from an investment perspective. But, you know, as investors think about 2021, their plan, you They have to start evaluating how these businesses are likely to perform in a post-pandemic world. And for Datadog specifically, I think the answer is yes, that companies will continue to benefit and use Datadog. The trends of enterprise digitization and cloud migration was already in full swing pre-pandemic because they were among the top of priorities with chief IT officers in corporations as a way to transform and move their companies forward, you know, from clunky manual methods and broke processes into the digital age. The pandemic, depending on your industry, either accelerated or slowed progress for this digitization and enterprise cloud migration. Datadog saw some cost optimization decisions with a handful of their large clients, particularly in those highly impacted industries, which made their Q2 performance slightly weaker than expected. But in Q3, as the outlook looked a little bit more firm and predictable, they reported that business activity returned to pre-COVID strength. And we do believe that that's because companies recognized the need for these tools as part of their longer-term operational plan, and they were just getting back on track. I also think, Chuck, that this question really re-emphasizes our left-brain thinking philosophy and what type of stock investments catch our attention. That is businesses which are a play on longer-term secular trends that will drive the business forward in a new economy. And again, we are long-term investors. You know, we look for big opportunities with a large addressable market and companies with a strong competitive position and high sales growth. And Datadog really checks off the list on many of these items, criteria that we have, and we like it as an investment.

It's Datadog, ticker DDOG. Janice Quek, thanks so much for taking the time to talk to me about it.

Thank you, Chuck.

Left Brain Thinking is a joint production of Left Brain Investment Research and Money Life with Chuck Jaffe. These conversations are not personalized investment recommendations, but are designed to engage your brain. Please do your diligence before making any financial transaction. I'm your host, Chuck Jaffe. Find my weekday show on your favorite podcast app or check it out online at moneylifeshow.com. Thanks to my guest, Janice Quek, senior analyst at Left Brain Investment Research. Learn more about the firm and its analysis at leftbrainir.com and on Twitter @leftbrainir. And don't forget to look for that fresh look on Datadog. Left Brain Thinking is available every Wednesday. Plan to put your left brain thinking cap on again every week by subscribing via your favorite podcast app. Until next week, stay safe, everybody.