Datadog Inc - Class A

Datadog, Inc. contributed to performance with the stock up 120.7% during the quarter after reporting its strongest results in years. Revenue accelerated to 32% year-over-year growth, marking the fourth consecutive quarter of acceleration and meaningfully exceeding consensus estimates. Operating margins and free cash flow also surpassed expectations. Management raised full-year revenue guidance by roughly $240 million against a $50 million beat, with next-quarter guidance implying continued strength. The strength was broad-based, with non-AI core customer revenue growth accelerating into the mid-20% range, while Datadog's AI-native customer cohort diversified and expanded to 22 customers spending more than $1 million annually.

Datadog provides key monitoring and observability capabilities to support modern cloud infrastructure. The company is positioned to benefit from the increasing complexity of technology environments and the rising demand for cybersecurity solutions. Our engagement with Datadog highlighted its proactive governance measures, including a proposal to reincorporate from Delaware to Nevada, aimed at enhancing shareholder rights and management accountability. This strategic move reflects Datadog's commitment to maintaining a strong governance framework while capitalizing on its competitive advantages in the observability and security software market.

Datadog is experiencing significant acceleration in its business, driven by the long-term secular growth drivers of digital transformation and cloud migration, now enhanced by AI capabilities. The company's ability to help customers deliver more value through AI is a transformative factor that strengthens its growth outlook. As AI adoption increases, Datadog is positioned to benefit from faster revenue growth and stronger customer spending, which are critical in the current market dynamics. This positions Datadog as a core long-term holding in the Fund, reflecting confidence in its future performance.

Datadog has been added to the portfolio as an optionality position, reflecting our belief in its potential within the evolving landscape of technology. The company is well-positioned to benefit from the ongoing trends in AI and data analytics, which are reshaping the industry. As capital reallocates towards AI beneficiaries, Datadog's capabilities in monitoring and analytics make it a compelling investment. We see its growth potential as significant, especially as the market continues to embrace AI-driven solutions.

Datadog provides key monitoring and observability capabilities to support modern cloud infrastructure. The company helps organizations monitor infrastructure, applications, logs, and cybersecurity across increasingly complex technology environments. Our latest engagement with the company focused on its proposal to reincorporate from Delaware to Nevada, which reflects a proactive effort to establish a durable governance framework while the business is operating from a position of strength.

Datadog scales recurring software as a service (SaaS) revenue as observability adoption deepens across enterprises and cloud native apps. These are all businesses where investors are underwriting multi-year revenue compound annual growth rates (CAGR’s) tied to AI, cloud, and digital transformation.

During the first quarter, we found several opportunities to lean back into existing holdings, including Datadog, Inc (DDOG). We believe Datadog can sustain mid-teens revenue growth while expanding margins. Our due diligence suggests that the company is well-positioned to benefit from the ongoing AI/data center buildout, which is a significant driver of growth in the sector. The company's focus on durable growth and high return on investment capital (ROIC) further supports our positive outlook.

Datadog operates a monitoring, observability and data security platform for cloud applications. Observability is a large and growing end market with penetration rising as use and complexity of applications grow, requiring more performance monitoring. Datadog is a leader in cloud application monitoring, offering ease of use, breadth and scalability superior to its competitors. We believe large language model (LLM) observability, a rapidly growing market due to the acceleration of Gen AI workloads, creates a new vector for growth not reflected in fundamental estimates. Datadog’s mission critical offering and rapid innovation should support attractive >20% revenue growth with an attractive valuation as the company further scales margin and cash flow.

Shares of Datadog, Inc. underperformed during the quarter, declining 30.6%. The company delivered strong fourth quarter results, ending the year with over $3 billion in Annual Recurring Revenue, sales growth of 26% and FCF margins of 29%. In 2024, growth was driven by large enterprises consolidating their observability stacks onto Datadog and by AI native start-ups using Datadog to monitor their rapidly growing AI applications. We view the contract optimization issue as short term and believe the larger volume commitments AI-natives are signing will fuel growth beyond 2025 as those customers scale. We are also supportive of the management’s decision to invest in product development and sales capacity that will position the company to continue taking share in the $50 billion-plus observability market longer term. We remain shareholders.

Datadog, which provides cloud-based monitoring of IT infrastructure, reported robust fourth-quarter sales, yet its shares fell along with those of other companies closely tied to AI innovation. Despite the volatility and uncertainty in the market, we remain optimistic about Datadog's long-term growth potential, particularly as it benefits from the ongoing demand for AI solutions and cloud services. The company's strong sales performance indicates its resilience and ability to capture market opportunities, making it a valuable addition to our portfolio.