Datadog Inc. is a market leader in the observability industry, with an expanding presence in international markets, a strategic partnership with Microsoft Azure, and a growing demand for its cloud monitoring and analytics solutions. Datadog is a promising investment for those who believe in its ability to maintain a competitive advantage, given its reasonable valuation relative to its competitors and robust revenue growth of 33% year-over-year in Q1 2023. Its single platform encompasses observability, security, and business intelligence across numerous cloud platforms, offering Datadog a strong competitive advantage in the enormous and rapidly rising market for IT operations management software, which is projected to reach $21.6 billion by 2026. To enhance its application security management capabilities, Datadog is consistently expanding its offerings and customer base, with increased penetration of cloud and next-generation DevOps clients, new products such as Data Streams Monitoring and Application Vulnerability Management.

Sector	Technology
Industry	Software & IT Services
Industry View	In – Line
Market Capitalization	$28.04B

Company Description : Datadog (NASDAQ:DDOG)

In the cloud era, Datadog, Inc. (Datadog) provides a monitoring and analytics platform for developers, IT operations teams, and business users. Its Software-as-a-Service (SaaS) platform incorporates and automates infrastructure monitoring, application performance monitoring, and log management in order to provide customers with real-time visibility of their entire technology stack. Datadog is utilised by businesses of all sizes and in a variety of industries to facilitate digital transformation and cloud migration, foster collaboration between development, operations, and business teams, comprehend user behaviour, and monitor key business metrics. The platform of the company provides insight and visibility into IT infrastructure, application performance, and real-time events. Its platform is utilised in public cloud, private cloud, on-premise, and hybrid multi-cloud environments.

Earnings Insights & Expectations : $DDOG

Datadog\’s revenue increased by 33% year-over-year to $481.7 million in the first quarter of its fiscal year 2023, surpassing analysts\’ projections by $12.7 million. Non-GAAP and GAAP EPS estimates were surpassed by $0.04 and $0.02, respectively.

Functional/Operating Activities

In terms of cashflows, Comparing the three months ended March 31, 2023 to the three months ended March 31, 2022, net cash provided by operating activities decreased $13.6 million, primarily due to a $52.8 million decrease in deferred revenue, a $25.2 million decrease in accrued expenses and other liabilities, and a $7.4 million increase in prepaid expenses and other current assets. The decrease in cash provided by operating activities was offset by an increase of $45.9 million in non-cash charges, a decrease of $36.1 million in accounts receivable, and an increase of $26.2 million in accounts payable. The majority of the increase in non-cash charges was attributable to an increase of $45.8 million in stock-based compensation as we continued to add personnel to support the business\’s growth.

Investing Exercises

The increase in net cash used in investing activities for the three months ended March 31, 2023 was predominantly driven by a $428.1 million increase in the investment in marketable securities. The increase in cash used in investing was offset by increases of $297.9 million in proceeds from maturities of marketable securities, $19.3 million in proceeds from the sale of marketable securities, and $4.9 million in cash paid for the acquisition of businesses net of cash acquired.

Financing Activities

Comparing the three months ended March 31, 2023 to the three months ended March 31, 2022, net cash provided by financing activities decreased $2.1 million, primarily due to a decrease in proceeds from the exercise of stock options.

Next Quarter Expectations: The revenue forecast for the upcoming quarter is $501.68 million, which would represent a significant increase from the actual quarterly revenue of $481.70 million. The non-GAAP EPS estimate for the next quarter is $0.28, while the GAAP estimate is $0.09.

Business Update

As of March 31, 2023, the company had approximately 25,500 customers, up from approximately 19,800 as of March 31, 2022, and spanning organizations of a broad range of sizes and industries.
The company plans to drive new customer acquisition by continuing to invest significantly in sales and marketing to engage prospective customers and increase brand awareness.
The company also intends to continue to invest in building brand awareness within the development and operations communities.
The company had approximately 2,910 customers with annual run-rate revenue (ARR) of $100,000 or more as of March 31, 2023, representing 85% of their ARR.
The company\’s dollar-based net retention rate was above 130% as of each of March 31, 2023 and 2022, indicating the propensity of their customer relationships to expand over time.
The company\’s land-and-expand business model allows them to efficiently increase revenue from their existing customer base, as customers often expand the deployment of their platform across large teams and more broadly within the enterprise.
Approximately 81% of their customers were using more than one product as of each of the periods ended March 31, 2023 and 2022, and approximately 43% of their customers were using more than four products, up from approximately 35% a year earlier.
The company plans to continue investing in building additional products, features, and functionality to expand their capabilities and facilitate the extension of their platform to new use cases.
Revenue from regions outside of North America was approximately 29% and 28% of total revenue for the three months ended March 31, 2023 and 2022, respectively, and the company plans to make significant investments to expand geographically, particularly in EMEA and APAC. Source : https://investors.datadoghq.com/investor-relations/

Discovering Growth Drivers

Maximizing the Potential of OpenAI AI Models with Datadog\’s Observability Capabilities

Datadog is not only a market leader in observability, but also a pioneer in the emerging field of AI-powered software development. Recently, Datadog announced a new integration that monitors OpenAI API usage patterns, costs, and efficacy for various OpenAI models, including GPT-4 and other completion models. Datadog intends to incorporate OpenAI\’s capabilities into its platform so that clients can utilise AI for software development, content creation, and other purposes, allowing them to concentrate on what matters most: enhancing day-to-day operations and innovating products and services.

Understanding user interactions with GPT-powered applications is crucial for discovering opportunities to refine models and improve user experiences. Monitoring API usage and token consumption is also crucial for controlling costs and enhancing application performance. With Datadog\’s OpenAI integration, businesses can now gain visibility into ChatGPT usage, latency, and token consumption to optimise the performance, end-user experience, and cost of their AI applications.

One of the main growth drivers for Datadog\’s integration with OpenAI is the increasing adoption of GPT-4 and other completion models, OpenAI\’s most recent generative AI model. As an increasing number of teams within organisations experiment with ChatGPT, the ability to monitor and optimise their performance becomes essential. Datadog\’s observability capabilities simplify the process of data collection via tracing libraries, allowing customers to start monitoring their OpenAI usage swiftly and easily.

Another factor contributing to growth is the capacity to support multiple AI models, such as Ada, Babbage, Curie, and Da Vinci. In addition to the GPT family of large language models, Datadog\’s integration permits organisations to monitor performance, costs, and utilisation for these models. This extensive coverage of AI models enables organisations to effectively manage their AI expenses, avoid unexpected expenditures, and identify and isolate application performance issues from API performance issues.

Monitoring API error rates, rate limits, and response times, Datadog\’s integration with OpenAI also enables organisations to optimise their AI applications. Users can identify and isolate application performance issues from API performance issues in this manner. In addition, users can view their traces and records, which include examples of prompts and completions, to comprehend key application bottlenecks and user behaviours.

In conclusion, the incorporation of Datadog with OpenAI is a significant advancement for organisations seeking to optimise the performance, end-user experience, and cost of AI applications. With the ability to monitor and optimise OpenAI usage patterns, costs, and performance, businesses can concentrate on enhancing day-to-day operations and developing new products and services. Moreover, Datadog\’s extensive coverage of AI models and observability capabilities make it a viable option for businesses seeking to more effectively manage AI expenses and avoid unexpected bills. Source:https://investors.datadoghq.com/news-releases/news-release-details/datadog-integrates-openai-chatgpt-help-organizations-monitor-ai

Expansion into new markets: Datadog expanded into new markets such as Japan and Australia, where it launched a new data center in April 2023 and opened new offices and hired local teams to support its growing customer base. Datadog also increased its headcount by 46% year-over-year to over 3,000 employees as of March 31, 2023. Datadog’s international revenue grew 51% year-over-year in the first quarter of 2023 and accounted for 29% of its total revenue.
Strategic partnership with Microsoft Azure: Datadog announced a strategic partnership with Microsoft Azure in September 2020, which will enable Azure customers to easily access Datadog’s platform from within the Azure portal and benefit from a seamless integration of Datadog’s features with Azure’s cloud services. This partnership will expand Datadog’s reach to more than 1.3 million active Azure customers and create new opportunities for cross-selling and upselling.
Increasing demand for data visualization and monitoring solutions: Datadog operates in a large and growing market for IT operations management software, which help organizations manage their complex and ephemeral cloud environments. According to IDC, the worldwide market for IT operations management software was $14.7 billion in 2021 and is expected to grow at a CAGR of 9.8% to reach $21.6 billion by 2026. Datadog has a competitive advantage in this market with its unified platform that covers observability, security, and business intelligence across various cloud platforms. Source : https://www.idc.com/getdoc.jsp?containerId=US48825921
Launch of Data Streams Monitoring and Application Vulnerability Management products: Datadog launched two new products in the first quarter of 2023 to enhance its observability and security platform for cloud applications. Data Streams Monitoring is the first and only solution that automatically visualizes all interdependencies and key health metrics across all streaming data pipelines, such as Kafka and RabbitMQ. Application Vulnerability Management is a product that integrates with Datadog\’s Continuous Profiler to detect and prioritize application security issues in real-time. Source : https://www.datadoghq.com/product/data-streams-monitoring/
Acquisition of Sqreen: Datadog acquired Sqreen, a leader in application security management, in April 2021 for an undisclosed amount. Sqreen’s technology is enabling Datadog to offer end-to-end security monitoring across the entire application lifecycle, from development to production. This acquisition is strengthening Datadog’s security portfolio and differentiate it from its competitors.
Reasonable valuation compared to peers: Datadog’s stock price has declined more than 60% from its all-time high in November 2021, making it more attractive for investors who believe in its long-term growth potential. Datadog also had a free cash flow margin of 28% in Q1 2023, indicating its profitability and financial strength.

Revenue growth of 33% year-over-year in Q1 2023: Datadog reported revenue of $481.7 million in the first quarter of 2023, up from $363 million in the same quarter of 2022. This growth was driven by its expanding customer base and multi-product adoption. Datadog had about 2,910 customers with annual recurring revenue (ARR) of $100,000 or more, up 29% year-over-year. Datadog also increased its dollar-based net retention rate to 130%, indicating strong customer loyalty and upselling. Datadog\’s revenue growth is fueled by the increasing demand for cloud monitoring and analytics solutions as more businesses migrate their workloads to the cloud. Datadog enables customers to confidently migrate to the cloud by offering complete visibility into cloud, on-premises, and hybrid environments. Datadog also partners with leading cloud service providers, including AWS, Azure, and Google Cloud Platform.
Increased penetration of cloud and next-generation DevOps clients : Datadog has over 23,000 customers, including notable brands such as Adobe, Airbnb, and Spotify. The platform of Datadog supports contemporary cloud applications and DevOps practises, such as microservices, containers, serverless, and continuous delivery. Datadog provides a centralised platform that automates and incorporates infrastructure monitoring, application performance monitoring, log management, real-user monitoring, and security monitoring.
Expansion of customer products and use cases: Datadog continues to invest in R&D to enhance its platform and introduce new features and products to meet customer requirements. Datadog has expanded into new markets and product categories, including artificial intelligence, log management, cloud security, network performance monitoring, synthetic monitoring, and incident management. In addition to leveraging its open-source community and ecosystem of integrations, Datadog supports over 600 distinct technologies and services.

Valuation : Overview

Valuation Ratios	Current	2023E	2024E	2025E
EV/ Sales	14.98	15.00	13.80	13.00

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