Datadog (NASDAQ: DDOG) he attracted a stampede of bulls when he went public. The cloud-based software provider priced its initial public offering (IPO) at $27 on September 19, 2019, and its stock opened at $40.35 before rising to an all-time high of $196.56 on November 9, 2021. USD.
At its peak, Datadog’s market capitalization reached $61.3 billion — or 36 times the revenue it would generate in 2022. But today it trades at around $126 on a market cap of $41.8 billion — which is only 16 times more than the revenue expected to produce in 2024.
The bulls retreated as Datadog’s growth cooled and rising rates reduced its valuation, but it still more than quadrupled its IPO price. Can this niche cloud player become like a cloud titan over time Microsoft?
What does Datadog do?
The Datadog platform monitors diagnostic data from an organization’s cloud servers, databases and applications in real time. It aggregates all this information into unified dashboards to help IT professionals spot potential problems.
From 2019 to 2022, Datadog’s annual revenue grew at a compound annual growth rate (CAGR) of 67%. Its number of large customers, generating more than $100,000 in annualized return (ARR), more than tripled during those three years.
But in 2023, Datadog’s revenue grew only 27% to $2.13 billion as the number of its large clients grew 15% to 2,780. For 2024, it expects revenue to grow by 20% to 21%. Analysts expect its revenue to grow at a CAGR of 25% from 2023 to 2026.
Datadog blamed its recent slowdown on macro headwinds, which have prompted many companies to scrutinize their spending on cloud-based applications. However, it still maintained its net income retention rate at around 115% over the last 12 months.
As revenue growth moderated, it reined in spending to stabilize its margins. From 2019 to 2023, its adjusted operating margin improved from negative 1.5% to positive 23%. It became profitable on a generally accepted accounting principles (GAAP) basis in 2023, and analysts expect its GAAP net income to grow at a CAGR of 58% from 2023 to 2026.
Datadog is still growing, but its market is maturing. The global market for observation tools and platforms could only expand at a CAGR of 11.7% from 2023 to 2028, according to Markets and Markets, and is already saturated with similar services such as Cisco Systems‘ AppDynamics and Splunk, DynatraceNew Relic, LogicMonitor, Microsoft’s Azure Monitor and IBMis Instant.
Could Datadog become the next Microsoft?
Today’s Datadog is comparable to Microsoft in fiscal 1992 (which ended in June 1992), when the future tech giant generated just $2.8 billion in revenue. From fiscal 1992 to fiscal 2023, its revenues grew at a CAGR of 15% to $211.9 billion.
To maintain a CAGR of 15% for more than three decades, Microsoft dominated the PC operating system and productivity software markets, transformed its desktop software into mobile and cloud-based applications, expanded its own cloud infrastructure platform, scaled its business with Xbox games acquisitions, and has made some big investments in the artificial intelligence market.
The saturation of the viewability market could make it difficult for Datadog to generate comparable revenue growth over the next three decades. Datadog has expanded its ecosystem with several acquisitions, but it doesn’t seem interested in developing into a consumer-focused cloud, mobile, artificial intelligence (AI), gaming and hardware company like Microsoft.
Instead, Datadog should continue to operate behind the scenes and help companies carefully monitor their cloud-based applications. That niche focus suggests it’s far more likely to be acquired — just as AppDynamics, Splunk and NewRelic have been in recent years — rather than stay independent and grow into a tech titan like Microsoft.
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Leo Sun has no position in any of the mentioned stocks. The Motley Fool has positions in and recommends Cisco Systems, Datadog and Microsoft. The Motley Fool recommends International Business Machines and recommends the following options: long $395 January 2026 calls on Microsoft and short $405 January 2026 calls on Microsoft. The Motley Fool has a disclosure policy.
Could Datadog become the next Microsoft? was originally published by The Motley Fool