Summary
- Datadog maintains strong performance in Q3, with 88% YoY revenue growth and raised guidance for Q4 and the full-year.
- Strong momentum gained in enterprise and mid-market segments combined with the new Security Monitoring product will drive further outperformance in the near to medium term.
- Having beaten its Q3 revenue guidance by ~9%, we expect a momentum continuation in Q4. We set a price target of ~$41.73 per share by the end of FY 2019.
Overview
Datadog (DDOG) continues its strong performance post its recent IPO in September 2019. In the Q3 earnings call, the company provided a significantly raised outlook for both Q4 and full-year guidance. Datadog will expect a Q4 revenue between $101 million - $103 million, which is higher than the consensus of $92.26 million. The full-year guidance sees revenue of $350 million - $352 million with a consensus of $330.2 million. Consequently, we maintain our bullish view in the company due to its strong financial outlook and execution ability to realize the potential upside in the enterprise and mid-size market.
Strong product that meets the demands across segments
As a company building analytics solutions for the IT professional and developers, Datadog competes across a few markets such as APM (Application Performance Monitoring), Log management, and more recently Security Monitoring. We think that these are some of the most fascinating technology markets that will not run out of growth pathways anytime soon. Driven by the adoption of containerization, microservices, and serverless computing across all segments from startups to enterprise, we even consider the $35 billion IT monitoring market size to be an underestimation. There are pockets of opportunities driven by either first-time adoptions or expansions from enterprises looking to monitor and improve the performance of their technology stacks.
Despite the massively growing opportunity, Datadog also competes in a relatively saturated market along with Dynatrace (DT), New Relic (NEWR), Splunk (SPLK), and more. Our initial skepticism in Datadog was more about its positioning in such a landscape going forward. In particular, we were cautious about how Datadog can extend its strong SMB adoptions to the mid and enterprise market with its offering. We consider Datadog’s flexible user interface that allows for easy metric-charting and integrations with other apps as its unique value proposition in the SMB market.
In Q3, however, we have learned how the company has actually gained exceptional momentum upmarket as the CEO, Olivier Pomel, suggested:
In the third quarter we saw strong new logo additions as well as extension from existing customers. As of the end of the third quarter, we had approximately 9,500 customers up from 7,100 a year ago. We ended with 727 customers with an ARR of $100,000 or more, up 93% from year ago, at an increase of more than 130 in the quarter alone. Given that more than 70% of our ARR is generated from customers over $100,000, we expect this cohort of customers to be a large driver of our future growth.
With such impressive traction, we have grown our confidence in not only the offering but also the management’s execution abilities to continually land higher-valued and relatively more complex deals. Furthermore, the company’s recent move into the Security Monitoring market will also allow it to maintain both the expansion momentum within its existing user base and eventually its staggering 130% dollar-based net retention rate.
