The Datto (MSP) IPO is this week and the current range is $24-27. The deal is expected to price and trade well based on early indications.
Positioning in a Nutshell
There are a few things that make Datto different from other cloud IT companies:
- Datto is going after a very specific segment – SMB customers who are large enough and reliant enough on technology to require the services of a managed service provider (MSP) to help them with their IT. There is a giant chasm between large enterprise solutions and DIY products.
- An MSP-centric business model is a huge advantage for them. Most technology vendors try and have it both ways – use service providers *and* sell directly to customers, especially larger ones. That creates channel conflict and churn. Datto has built its whole company around making its MSP community successful in servicing end customers.
- Datto really provides two sets of technology solutions. One is for the SMB end customer and in simple terms is oriented towards backup and restoring applications and networking. In addition to these core solutions for SMBs Datto provides a set of technologies and services that enables the MSP to successfully serve this market and manage their business. This includes tools for driving revenue growth, managing profit margins, and support tools like ticketing, workflow, remote remediation, technical support and training.
- The result is a moderate growth company with recurring revenues, excellent margins and profitable operations. For the first six months of 2020, the company generated revenues of ~$250M and net income of $30M.
Nobody wants to do backups and business continuity. There are at least 1/2 dozen decent DIY solutions out there but the features and pricing don’t matter. Even if an SMB has the desire, time, and energy to focus on this they will most likely get it wrong and discover their mistake at precisely the wrong time – when they need to restore lost applications and data.
This market is also benefitting from tailwinds like the acceleration of online businedattss and remote work. Security concerns continue to escalate and the arrival of ransomware gets SMB owners even more worried.
The deal checks lots of the boxes in terms of TAM, management team, and differentiation which leaves us with valuation to consider.
Valuation & Stock Conclusion
Because Datto is somewhat unique in their model it makes comparables less informative and valuation a bit harder to pin down. There’s a comps table here more to stimulate thinking than provide a clear signal on valuation. One recent IPO that feels very similar in some ways is Bills.com ($BILL) which you can read about here: Bill.com aims to streamline the SMB back-office
Going even further back there was RingCentral (RNG) which is still a strong solution in this market. RingCentral IPO Basics
But our present future value (PFV) model is more helpful in providing at least an approximate base case for evaluating the stock around the IPO price. At the upper end of the range ($27) it’s certainly attractive given our $40 PFV value.
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