Datadog (DOG -2.52%) When it became public, the bulls were in a frenzy. Cloud-based software company priced its IPO at $27, on September 19, 2019. Its stock opened at $40.35, before rising to $196.56 in November 2021.
Datadog reached a market capitalization of $61.3 billion at its peak — 36 times more than the revenue that it was expected to generate by 2022. Today, Datadog trades for about $126 and has a $41.8 billion market cap — just 16 times what it is expected to earn in 2024.
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Bulls backed off as Datadog’s valuations were lowered by rising rates and a slowing growth rate. However, it has still quadrupled since its IPO. Can this niche cloud provider become as big as Amazon or Google? Microsoft?
What is Datadog?
Datadog monitors diagnostic information from an organisation’s systems cloud serversIt aggregates all of this information into unified dashboards to help IT professionals spot potential problems. This software aggregates this information into a single dashboard to assist IT professionals in spotting potential issues.
Datadog’s revenue grew at a CAGR of 67% from 2019 to 2022. The number of its large customers who generate more than $100,000 per year in annual recurring revenues (ARR) has tripled over the past three years.
Datadog’s revenues in 2023 will only increase by 27%, to $2.13 Billion. However, its large customer base is expected to grow 15% to 2,780. In 2024 it anticipates a revenue increase of 20% to 21%. Analysts predict that its revenue will grow by a CAGR between 2023 and 2026 of 25 percent.
Datadog attributed its recent slowdown to macro-headwinds that prompted many companies scrutinize the spending they made on cloud applications. It still maintained its net revenue retainment rate at 115% in the last 12 months.
It cut back on spending as its revenues slowed down. This helped to stabilise its margins. Its adjusted operating margin increased from a negative 1.5% in 2019 to a positive 23% by 2023. The company became profitable using generally accepted accounting practices (GAAP).GAAPAnalysts expect the company’s GAAP-based net income to increase at a rate of 58% between 2023 and 2026.
Datadog’s market is mature, even though it is still growing. According to Markets and Markets the global observability tool and platform market is expected to grow at only a CAGR 11.7% between 2023 and 2028. It’s also saturated with services such as Cisco Systems‘ AppDynamics & Splunk, DynatraceMicrosoft Azure Monitor and New Relic are both available. IBM‘s Instana.
Can Datadog be the new Microsoft?
Datadog today is similar to Microsoft in 1992, when it generated only $2.8 billion of revenue. Its revenue increased at a 15% CAGR from fiscal 1992 to fiscal 2020, reaching $211.9 Billion.
Microsoft has maintained a CAGR over the past three decades of 15 percent. It has transformed desktop applications into cloud and mobile apps, developed its cloud infrastructure, grown its Xbox gaming division through acquisitions and even made some significant investments. big investments AI is a growing market.
Datadog may find it difficult to achieve comparable growth in revenue over the next 30 years due to the saturation of the market for observability. Datadog’s ecosystem has grown with some acquisitions. However, it does not seem to be interested in becoming a cloud-based, AI, gaming and hardware provider like Microsoft.
Datadog, on the other hand, should remain in the background and continue to help businesses monitor cloud-based apps. This niche focus makes it more likely that Datadog will be acquired, just like AppDynamics and Splunk were recently, instead of remaining independent and becoming a tech giant, such as Microsoft.
Leo Sun The Motley Fool has no positions in the companies mentioned. The Motley Fool recommends and has positions in Cisco Systems, Datadog and Microsoft. The Motley Fool suggests International Business Machines, and also recommends these options: Long January 2026 $395 call on Microsoft or short January 2026 $400 calls on Microsoft. The Motley Fool is a Disclosure policy.