The need for data analytics providers is increasing as the digitization trend is leading to corporate IT departments drowning in data. Corporate systems are constantly generating logs, which are large volumes of potentially useful data that can be difficult for a company to monitor and analyze.
Enter Datadog, Inc. (DDOG, Financial), a comprehensive analytics solutions provider for companies that helps corporate IT departments sift through software logs and consolidate them onto a single screen, allowing them to easily monitor infrastructure, application performance, user experience and network performance. The company has had a phenomenal runup due to the increased digitization trend that was accelerated by the Covid-19 pandemic, but could the stock have further growth potential left?
Company overview
Datadog operates on a SaaS (software-as-a-service) model with its platform providing monitoring and analytics solutions to developers, information technology operations teams and business users in the cloud in North America and abroad. The company’s platform integrates and automates log management, application performance monitoring, security monitoring and infrastructure monitoring in order to ensure real-time observability of customers' technology stack.
Its platform also enables the monitoring of user experience and network performance monitoring and helps with incident management. Datadog looks to provide a variety of features such as high-quality dashboards, advanced analytics, collaboration tools and alerting capabilities through its offerings.
Strong product application
As more companies are migrating to the cloud and their infrastructure becomes more complex, monitoring the performance of their applications and infrastructure can be more difficult. Datadog's platform enables developers and operations teams to monitor and act on performance. Users can identify problems and gain key insights to improve their software, which greatly benefits developers and IT teams. With its three pillars of observability approach, the company has empowered IT teams to observe everything they need on a single platform, from infrastructure to user experiences. This simple view of the data enables teams to take action on it. Datadog's platform also detects trends and correlations in data, enabling customers to take action by developing new applications. Another significant advantage of Datadog is the ability to understand user behavior and track key business metrics easily.
The company has gained the trust of 16,400 IT teams as a result of all of the benefits it offers. It is worth highlighting that Datadog operates in a highly lucrative macroeconomic environment. As per Gartner estimates, the IT operations management market will be worth $44 billion by 2024, and the company currently has only 1.7% of that market with $764 million in trailing-12-month revenues. Even with 16,000+ customers, Datadog clearly has a lot of room to grow.
Deep database monitoring
Datadog recently announced the general availability of Database Monitoring (DBM). Database Monitoring provides engineers and database managers with the visibility they need to quickly obtain and fix application performance issuances caused by slow-running database queries, including insights into query performance and automated correlation of query metrics with application and infrastructure metrics. Datadog Database Monitoring expands the existing ability to monitor the general health and availability of the database and fundamental infrastructure by allowing users to pinpoint certain queries that affect application implementation and user experience. Moreover, DBM allows users to view database query performance, troubleshoot slow queries with comprehensive execution breakdowns and analyze historical trends in query latencies and overhead. This enables organizations to improve the database performance, along with the performance of the upstream applications, APIs and microservices that the database supports.
With the help of its offering, DBM users can identify resource bottlenecks by automatically correlating query performance data with Datadog infrastructure metrics. This helps engineers to determine whether performance issues are at the database or infrastructure level without manually exporting and reconciling data from multiple, disconnected point solutions. Datadog's amalgamated data model makes it simple to search and filter data at scale using the same tags that are used throughout the application. Overall, the management believes that DBM will enable organizations to identify and implement improvements while saving time collaborating and reconciling data.
Final thoughts
As we can see in the above chart, Datadog has had a fantastic 2021 with the stock price nearly doubling and earnings consistently exceeding shareholder expectations. The management is heavily investing in the development of new services to improve observability and has already invested close to $174 million in new product research and development in 2021. Given the high-level customer loyalty, Datadog’s customers could latch onto these products, allowing them to research even deeper into the company's product ecosystem.
In terms of valuation, Datadog is not cheap after the recent runup and is trading at an enterprise-value-to-revenue multiple of 65.66 and a price-book ratio of 55.63, which are among the highest in the SaaS domain. While it is definitely a very attractive stock, I recommend that investors approach it with caution and perhaps wait for a pullback before entering.
