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Datadog’s IPO Shows the Shift to Cloud Infrastructure

Datadog's success highlights a world turning more and more toward cloud computing.

In a year of blockbuster IPOs, DataDog [DDOG] might be one of the season’s biggest highlights. The SAAS infrastructure security and monitoring company went public at $27 per share and promptly rocketed 40%.

And shortly after this fantastic debut, news broke the company turned down Cisco System’s $7 billion acquisition attempt – Cisco purchased AppDynamic on the eve of its IPO back in 2017 to the tune of $3.7 billion. DataDog turned down the generous offer because it believed it could be worth more over time as a publicly traded company.

There is certainly good reason to believe this as the company saw year-over-year revenues for the first six months of 2019 explode for 79%. One of the positive selling-points for DDOG’s technology is the focus on infrastructure monitoring, a relatively novel and sticky subscription for company’s as the monitoring service becomes a crucial component of the forward-facing application. Datadog’s dollar-based net retention rate was 146% as of the end of June, and that rate has held steady for months

Here is how the company describes what it does in its prospectus:

Our SaaS platform integrates and automates infrastructure monitoring, application performance monitoring and log management to provide unified, real-time observability of our customers’ entire technology stack. Datadog is used by organizations of all sizes and across a wide range of industries to enable digital transformation and cloud migration, drive collaboration among development, operations and business teams, accelerate time to market for applications, reduce time to problem resolution, understand user behavior and track key business metrics.

Software applications are transforming how organizations engage with customers and operate their businesses. Companies across all industries are re-platforming their businesses to cloud infrastructures to enable this digital transformation. Historically, engineering teams have been siloed, making the development of next generation applications on dynamic cloud environments challenging.

DataDog has more than 8,800 customers and 40 customers with $1 million in annual run-rate revenue (ARR) including Morgan Stanley, HSBC, Salesforce, Comcast, Starbucks, Maersk, and Lenovo. What makes DataDog such a strong competitor in the space is that the company’s service is cloud agnostic meaning its monitoring tools are available in Amazon, Microsoft Azure, Google Cloud or a private network.

DDOG is valued currently at $10.7 billion – the company’s valuation was ~$7 billion at the IPO price of $27 per share, at which it raised $648 million in gross proceeds. The company has earmarked the funds for corporate development and possible acquisitions. An additional $97 million could be raised through a “green shoe” or overallotment option selling an additional 3.6 million shares at the original price.

The company’s success is indicative of a corporate world that has shifted toward cloud computing and cloud innovation. Serverless computing is a cheaper solution for most companies and offers more elastic solutions for storage and backup. Datadog’s multi-cloud analysis tool is growing fast, it saw 97% increase in revenues last year – meaning more and more companies are simply multiplying their cloud space to expand operations.

At the moment, DDOG’s revenues largely come from the US – only 24% come outside of North America – and soon they will be expanding. The company sees much opportunity in the infrastructure monitoring market and believe they have only tapped 1% of the addressable market, according to their prospectus. And as more and more companies looks to compete in a faster and faster economy, any Google Cloud, Amazon Web Service or Microsoft Azure company is a potential client for Datadog – that is a pretty strong business model at the moment.


Equities Contributor: Stephen L. Kanaval

Source: Equities News

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