DataDog: The next Salesforce?

Note: Before you read below, please note that this is not to be treated as financial advice. All views are my own and you should DYOR and conduct thorough Due Diligence before investing in risky asset classes. Also, note that the author has an open position on $DDOG.

Olivier Pomel and Alexis Lê-Qu?c, the two co-founders as well as CEO and CTO of Datadog respectively, used to work at Wireless Generation, a NY-based SaaS company focusing on the education sector. Olivier was running a team of Developers there whereas Alexis was leading Operations. As Developers and Operations team have to work together in many cases to accomplish project objectives, Olivier and Alexis got to know each other really well and became friends over time.?

Generally speaking, Developers and Operations team used to work in silos and were prone to have somewhat acrimonious relationship. While developers write code and build the applications, the operations team is responsible for these in production. Given the natural tendency of blaming each other in these teams when something inevitably breaks, Olivier and Alexis had a "no jerk" policy in hiring. Even then, Olivier and Alexis found their teams routinely at odds against each other.

Two things happened almost simultaneously that led Datadog to be at the right place at the right time: a) these silo structures between Developers and Operations started to fall apart as DevOps, the idea of a more cohesive, integrated workflow gained more momentum, and b) the rise of cloud fundamentally changed how developers and operations used to co-ordinate with each other. Datadog founders bet both of these to be secular trends.

Despite the material drawdown in software this year, it is surprising to me the kind of assumptions the market has to believe it to make a decent return

Take $DDOG for example which is widely loved.

Many bulls cite companies such as $DDOG or $CRWD as the next "Salesforce". So, I wanted to look back and see what happened with $CRM. CRM numbers in '09 are more or less similar to DDOG in '21 except for Opex per headcount which understandably crept up over time.

Nobody really knows how big or profitable DDOG will be in 2030. So, let's look at what happened to CRM 9 years after FY'09.

Let's start with the good news.

CRM market cap was almost 19x from Jan'09 to Dec'17.

But that's the market cap. Stock was up ~11x.

Diluted shares outstanding FY'09: 501 Mn

Diluted shares outstanding FY'18: 700 Mn

SBC matters (see image).

~11x is still pretty good, so hard to complain too much.

So, what was CRM's operating performance in 9 years since FY'09? In FY'18, CRM posted ~$7.8 Bn Gross Profit (GP). To generate this GP, CRM spent $7.3 Bn in opex with ~29k employees. Avg. opex per headcount was ~$270k.

When I was modelling DDOG for 2030, I consciously decided to be slightly "generous" in all of these assumptions.

In 2030, I modelled DDOG,

GP $8.6 Bn

Opex $7.2 Bn

# of employees ~26k

Avg. Opex per headcount ~$300k (same as it was in 2021)

Now, let's say you want a double from here to 2030 in DDOG. The current market cap is ~$25 Bn, so we need a $50 Bn market cap in 2030. As you can see, entry prices of CRM (~$4 Bn in Jan'09; was $8-10 Bn in much of '08-'10) vs DDOG are VERY different even though operating # are similar.

Based on earlier assumptions, $50 Bn Enterprise Value (EV) implies ~35x 2030 GAAP EBIT. But that's EV (or market cap to keep things simple). For the stock to double, the market cap probably needs to be even higher as DDOG mentioned they're targeting ~3-5% dilution each year.

BTW, CRM didn't get to ~$8 Bn gross profit organically. They spent $7.3 Bn in cash acquisitions between FY'09-FY'18. And 10-year treasury yield in 2017 was ~2.0-2.5%. If it were ~4% as it is today, CRM's market cap would obviously be lower then.

Even a replication of $CRM, which is no easy feat, may mean a somewhat lacklustre return for DDOG shareholders. You need much better than CRM results.

~35x *2030* GAAP EBIT for not even a double? Well, you can pay ~35x NTM AWS GAAP EBIT to buy the whole $AMZN today.

So can $DDOG bounce back from lows after mostly macro-driven drawdowns in its stock in the near term? Potentially. But does that make it a good fundamental buy for the long term i.e. 5-10 years? Not necessarily.