DataDog (DDOG) priced their IPO last night above the increased range at $27. Shares will begin trading today. Despite some broad selling in “high growth software stocks” today we expect the shares to do very well. Perhaps too well for investors to make any money after the open.
DataDog is in the “next generation monitoring” space along with companies like New Relic (NEWR), Dynatrace (DT), Splunk (SPLK) and AppDynamics (acquired by Cisco). To a lesser extent some products from SolarWinds (SWI) and PagerDuty (PD). Elastic (ESTC) has launched a number of products that integrate with their core search and analytics features to offer a kind of “roll your own” infrastructure and application monitoring tool.
The IT Operations Market is large and growing, especially around newer technologies like containers, microservices and “serverless” computing models. FWIW Gartner puts the market size is over $30B. DDOG pegs their market opportunity at $35B using more refined numbers based on customer size and average DDOG ASPs. There is little doubt about the market opportunity.
Businesses no longer really run on “applications” but rather complex networks of applications and services. It’s always going to be impossible to never make a mistake or have an outage when one of these many components fails. The question is “how fast can you recover?” Early detection is critical to composing a response and performing remediation. The costs for even a few minutes of downtime are considerable and according to a Rand Study a third of companies estimate that an hour of downtime costs then more than $1M.
Platform and Competition
First of all there are a lot of infrastructure monitoring and application performance management solutions out there. At least scores if not hundreds. Some from more traditional vendors like SolarWinds, others from major players like Splunk and others from niche vendors that focus on one or a few aspects of the monitoring world. In fact there are so many companies in the “DevOps” space that if you search on leading names you’ll find dozen of lists and many of them have little overlap with one another – the market is highly, highly fragmented.
And the major platforms like Microsoft Azure and Amazon AWS have their own application and system monitoring tools. These are mostly focused on their own cloud platforms rather than a mixed vendor and/or hybrid cloud.
From time to time the entire IT industry goes through what some call “re-platforming” where the center of the computing architecture shifts. We’ve had client-server, 3-tier, n-tier, cloud and now fully distributed “serverless” computing. When we shift it creates big opportunities for new companies who have designed and built their solutions for the “new IT stack.” Many of the old products and even vendors fade away, while new ones bloom and if they execute well can become the new market leaders. Concepts like “containers” have driven innovation and adoption of whole new technology ecosystems like Kubernetes and Docker.
Datadog is really a data integration and visualization company that has decided to focus on DevOps. They started with infrastructure monitoring, then introduced APM and finally log management. (In contrast Splunk started with log management and moved into APM and infrastructure monitoring.)
It’s clear to everyone that customers, especially larger ones, are tending more toward platforms than point-products. This is why we’ve seen so much consolidation. Datadog offers a fairly complete solution and as they say can offer “full-stack observability in a single pane of glass” and this is indeed one of the features customers are looking for.
Datadog also gets very high marks for ease of initial implementation and their UI. They also offer a self-service option which helps make their selling process more efficient and enables them to gain share from legacy vendors who typically reply on forcing prospects to talk to sales staff.
In short the major platforms have their own tools but they work mostly with their own platforms and there are scores of point solutions available but there are only broad “solutions” players like AppDynamics, NewRelic, Splunk, Dynatrace and DataDog.
We expect to say much more consolidation in this space. There are too many separate companies all working on solving the same problems.
Stock Conclusion and Valuation
As far as the DDOG IPO is concerned it has been designated “hot” almost as soon as it filed. That’s due in part to the continued momentum in Enterprise SaaS IPO market and their strong numbers – 80%+ growth, 146% $-based retention rate, and a cover headlined by Morgan Stanley, Goldman and a cast of 10 additional banks.
Investors can be assured that there is no “edge” given how many eyes are on this one. With the deal pricing above the range at $27 the valuation is just over 21x our estimate of 2019 revenues.
Our PFV is below and suggests there is still some upside but the stock may open at a price that leaves little to nothing on the table, at least in the short term.
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