Can Datadog become the next Microsoft?

data dog (DDOG -2.52%) When it was listed, a herd of bulls gathered. The cloud-based software provider priced its initial public offering (IPO) at $27 on September 19, 2019, and the stock price opened at $40.35, before dropping to a historic low on November 9, 2021. It rose to a high of $196.56.

At its peak, Datadog’s market cap reached $61.3 billion, which is 36 times the revenue the company will generate in 2022. However, it is currently trading at around $126, giving it a market capitalization of $41.8 billion. This is just 16 times expected earnings. Generated in 2024.

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Bulls have receded as Datadog’s growth slowed and rising interest rates compressed its valuation, but it’s still more than four times its IPO price.This niche cloud player could eventually become something of a cloud giant microsoft?

What does Datadog do?

Datadog’s platform monitors diagnostic data from your organization’s cloud servers, databases, and applications in real time. All information is aggregated into a unified dashboard to help IT professionals identify potential issues.

From 2019 to 2022, Datadog’s annual revenue had a compound annual growth rate (CAGR) of 67%. In his three years, he has more than tripled the number of large clients with annual recurring revenue (ARR) of over $100,000.

However, in 2023, Datadog’s revenue only increased 27% to $2.13 billion, even though the number of large customers increased 15% to 2,780 companies. We expect sales to increase by 20-21% in 2024. Analysts expect the company’s revenue to grow at a CAGR of 25% from 2023 to 2026.

Datadog blamed the recent economic slowdown on macro headwinds that have caused many companies to scrutinize their spending on cloud-based applications. However, over the past 12 months, the net revenue retention rate has still been around 115%.

As sales growth slowed, the company cut back on spending to stabilize profit margins. From 2019 to 2023, adjusted operating margin improved from -1.5% to +23%. The company will be profitable under generally accepted accounting principles (GAAP) in 2023, and analysts expect the company’s GAAP net income to grow at a CAGR of 58% from 2023 to 2026.

Datadog is still growing, but the market is maturing. According to Markets and Markets, the global observability tools and platforms market will only expand at a CAGR of 11.7% from 2023 to 2028 and is already saturated with similar services such as: Cisco Systems“AppDynamics and Splunk, dyna traceNew Relic, LogicMonitor, Microsoft’s Azure Monitor, and IBMThis is his Instagram.

Can Datadog become the next Microsoft?

Datadog today is comparable to Microsoft in fiscal year 1992 (ending June 1992). At that time, this future technology giant generated only $2.8 billion in revenue. From fiscal year 1992 to his fiscal year 2023, its revenue grew at a CAGR of 15% to $211.9 billion.

To maintain a 15% CAGR for over 30 years, Microsoft has dominated the PC operating systems and productivity software market, transforming desktop software into mobile and cloud-based apps, and expanding its proprietary cloud infrastructure platform. , grew its Xbox gaming business through acquisitions. , has made significant investments in the AI ​​market.

Saturation in the observability market could make it difficult for Datadog to generate comparable revenue growth over the next 30 years. Datadog has expanded its ecosystem with several acquisitions, but it doesn’t seem interested in evolving into a consumer cloud, mobile, artificial intelligence (AI), gaming, or hardware company like Microsoft.

Instead, Datadog should continue to work behind the scenes, allowing businesses to closely monitor their cloud-based applications. This niche focus suggests the company is far more likely to be acquired, as AppDynamics, Splunk, and NewRelic have been in recent years, than to remain independent and evolve into a tech giant like Microsoft. are doing.