Issue #43: Two next-generation tech firms reshaping the data monitoring and online advertising industries 🚨
Here’s what we found this week:
Datadog provides a solution for companies that generate more data than they can handle. Their software package is designed to integrate and analyze data and generate actionable insights. It seems to work: Datadog’s customer list is expanding daily and includes some of the biggest names in business.
The Trade Desk is leading an online ad revolution, delivering greater efficiency and allowing advertisers to maximize the gains from ad spending. Advertisers are responding by flocking to the Company’s platform, driving dramatic increases in revenue and earnings.
Datadog, Inc. ($DDOG)
$193.03 - Share price at time of writing
- Datadog is a monitoring and analytics platform that provides real-time visibility for a customer’s technology systems.
- Development, operations, and business teams use Datadog solutions to identify problems and resolve them before they affect operations.
- Adoption has been rapid. $DDOG jumped from 13,100 customers in Q3 2020 to 17,500 in Q3 2021. Per-customer annual revenue is also rising.
- The most recent quarterly report showed 75% revenue growth and 160% earnings growth from the equivalent quarter last year.
What they do:
Datadog offers a Software as a Service (SaaS) platform that provides “unified, real time observability of our customers’ entire technology stack”. It runs across cloud-based and on-site environments and gives development and operations teams full awareness of how their tech is working. It’s been described as a life jacket for companies drowning in data.
Datadog is designed to improve collaboration between development and operations teams. The platform “combines infrastructure monitoring, application performance monitoring, log management, user experience monitoring, and network performance monitoring in one integrated data platform”. This is a developer's way of saying that it keeps the developers and users on the same page and helps them solve problems before they get out of hand.
Many companies operate dozens of different applications, each of which generates massive amounts of data. Datadog monitors “the three pillars of observability” - metrics, traces, and logs - to produce real-time actionable insights.
This process may be difficult for people outside the IT landscape to understand, but customers seem to love it. The Company’s customer list currently includes names like Samsung, Shell, Lenovo, Nasdaq, Dreamworks, Comcast, Maersk, Lufthansa and many others.
In Q3 2021 77% of Datadog customers used two or more products and 31% used four or more. 1,800 customers spent $100k or above per year on Datadog products, up 66% from the year before. The dollar-based retention rate was 130%, indication that existing customers were increasing spending on $DDOG products.
What we learned from social media patterns:
$DDOG has seen a substantial spike in social media mentions since the Nov. 5 release of their Q3 2021 results.
Relative to other major tech companies the attention level is still relatively low. A jump from under 10 mentions a day to over 50 is high in percentage terms, but it doesn’t place the company among the top trending stocks.
Datadog has shown considerable appreciation and spectacular growth, but it’s still a relatively new company - $DDOG went public in 2019 - selling a product that most retail investors have never heard of. This tends to limit social media interest.
Notable comments from Reddit:
“I started investing on it early this year because I work as a Software Engineer and my two previous companies used Datadog for monitoring, and it gets a lot of love from developers.”
“As a developer I like working with ddog so much I bought their stocks. Their toolset is amazing, super simple to use and ever improving. Defo long on ddog”
💸 Signal: Ken Griffin of Citadel has purchased 1.27 million shares of $DDOG in 2021.
Why $DDOG could be valuable:
The global IT Operations Analytics market is forecast to grow from $9.3 billion in 2020 to $45.1 billion in 2025, a CAGR of 37.2%.
Datadog’s rapidly growing customer base, high profile customer list, and expanding sales per customer indicate that the product enjoys a high degree of acceptance and loyalty in its target markets.
$DDOG is not sitting still. The Company has invested $174 million in R&D in 2021 to date. The acquisition of Ozcode, announced on Nov. 4, has upgraded the Company’s ability to detect and resolve software bugs in production environments. Datadog launched 40 new products in Q3 2021.
Datadog has shown consistent rapid revenue growth.
Source: Business Quant
Revenue growth does not appear to be slowing: most recent quarter revenues were 75% above the equivalent quarter in the previous year. The Company has raised full-year revenue guidance from $941 million in Q2 to $994 million in Q3.
Growth is led by three primary drivers:
- Customers rose from 13,100 in Q3 2020 to 17,500 in Q3 2021
- Customers with spending over $100k on the platform were up 66% in Q3 from the equivalent quarter a year before.
- Existing customers spending more: net revenue retention has been over 130% for 17 consecutive quarters.
More customers, bigger customers, and increasing spending by existing customers adds up to sustainable revenue growth.
Free cash flow was over $57 million in Q3 2021, indicating that the Company is approaching profitability. R&D spending is driving the continued losses, but with almost $1.5 billion in available cash $DDOG is well positioned to keep investing in growth.
$DDOG has beaten analyst earnings estimates for four consecutive quarters.
Source: Yahoo Finance
21 analysts currently cover $DDOG, with a consensus “Buy” rating and an average price target of $204.11. Software analyst Jack Andrews of Needham & Co. claims that “the company represents arguably the strongest fundamental story in all of enterprise software” and has a price target of $236.
Datadog stock trades at 67x trailing 12 month sales, so it is by no means a cheap stock. The growth trend, the strong competitive position, and the rate of market growth suggest that this very new company could emerge as a dominant player in a major tech niche. If that turns out to be the case the stock could justify the expectations.
What the risks are:
$DDOG has never been profitable and may not achieve profitability.
Datadog operates in a competitive environment with no clearly dominant player. The Company will need to invest large sums in new product development in order to maintain its competitive edge. If it fails to generate enough cash flow to sustain these investments, its competitive position could be eroded.
The valuation of $DDOG stock is based on the assumption of continued rapid growth. If growth is slower than expected in any period the stock’s value could be affected.
Any data breach or failure to protect client data could have a major negative impact on the Company’s reputation and ability to attract new customers. $DDOG competitor Solarwinds has already been targeted, resulting in a major data breach. Datadog could be hit with a similar attack.
Bottom line: $DDOG is not an undiscovered stock, and its valuation could be a concern. Although, it is still a relatively new company with a remarkable growth story and an open-ended future.
The Trade Desk, Inc. ($TTD)
$105.18 - Share price at time of writing
- The Trade Desk is a buy-side advertising platform, helping ad buyers manage and track ad campaigns.
- $TTD’s cloud-based platform helps ad buyers build, run, and optimize ad campaigns in multiple formats and channels.
- The Trade Desk’s new Unified ID 2.0 system appears ready to deal with the problem of major platforms removing ad-tracking cookies.
- The Company is on a strong growth trend, with revenue and earnings smashing analyst estimates in the most recent quarter.
What they do:
The Trade Desk creates tools that empower ad buyers. The Company’s products help ad buyers develop more effective ad campaigns across multiple ad channels, including native, social, in-app and in-game, audio, video, and display, and on multiple devices, including mobile, computers, and connected TV.
$TTD provides customers with continuous visibility on ad data, allowing them to refine and target their ad buying to maximize their return on ad spend.
Trade Desk’s primary customers are ad agencies and other service providers representing advertisers. These companies enter into Master Service Agreements with The Trade Desk, paying a percentage of their total ad spend as a fee. Trade Desk also provides value-added data and other services that yield additional revenue.
The Trade Desk offers a transparent platform that gives users clear visibility on all costs and performance metrics. Clients can customize the platform and build their own features on top of it to meet specific needs. $TTD’s new Solimar ad trading platform features an upgraded interface and AI-driven spend optimization.
Customer retention is consistently over 95%.
Online ad companies like $TTD have been threatened by privacy moves that have seen major platforms like Google and Apple removing ad-tracking cookies. The Trade Desk has joined with other industry players to develop a new system, Unified ID 2.0, that will allow ad tracking and analytics without cookies
What we learned from social media discussion:
$TTD has seen a sharp spike in social media mentions in the last few days.
This appears to be driven by two factors:
The November 10 Q3 earnings release triggered a surge in discussion and a number of analyst upgrades.
That attention triggered a surge in options trades. On Nov. 15, the day of the social media peak, total options trades were over 18% of the total open interest in the stock. Roughly 75% of those were call options, indicating short-term bullish sentiment.
Options trades generate a large amount of social media discussion, which explains the Nov. 15 surge in mentions.
Notable comments from Reddit:
“FB/GOOGL offer targeting/strategy etc. But they won’t let you take their targeting data outside of their systems. Where TTD attempts to track users across as many platforms as possible and allow advertisers to store that data.”
“They are the leading platform for more intelligent tv advertising. TTD will continue to benefit from the cord cutting revolution, which is far from over. Market Cap is $40b. Everything is expensive right now but they’ve got room to grow.”
💸 Signal: Blackrock, The Vanguard Group, and Baikie Gifford hold a combined total of over 113 million shares of $TTD, almost 25% of the float.
Why $TTD could be valuable:
Trade Desk executives state that the total advertising market is at $750 billion and should cross the $1 trillion mark soon. Ad spending is rapidly moving toward targeted digital ads.
The new Solimar service consolidates multiple ad targeting and performance measurement tools into a single interface, and the Unified ID 2.0 ends advertiser dependence on third-party cookies and the privacy issues they create. Market reception of both has been strong.
The Trade Desk moves ad buyers outside the “walled gardens” offered by Google and Facebook, both of which provide analytics aimed at keeping users on the platform, rather than maximizing user ad budgets. $TTD’s ability to work across multiple platforms and devices is a strong competitive factor.
Connected TV (CTV) is emerging as a major ad channel. $TTD already reaches 120 million CTD devices. The cost per 1000 impressions on CTV ads is double the cost for traditional TV ads, an indication of the value advertisers place on this channel.
$TTD has shown consistent strong revenue growth for years. The Company was ranked #6 on Fortune Magazine's “100 Fastest-Growing Companies of 2021” list.
Source: Investors Place
$TTD has seen a dramatic increase in free cash flow, indicating that the Company is well placed to invest in further growth.
$TTD has minimal debt, a solid operating margin of 22.9%, and ROE of 26.38. These figures indicate strong financial management.
Unlike many high-growth tech companies, $TTD is consistently profitable and showing rapid growth in earnings. Diluted EPS grew over 116% from $.23 in 2019 to $.49 in 2020. Earnings in Q3 2021 alone reached $.18/share, beating analyst estimates by 12.5%. Earnings have beaten analyst estimates for 4 consecutive quarters.
The Trade Desk’s Q3 2021 results showed strong growth across the board, indicating overwhelming acceptance of the Solimar system and Unified ID 2.0. The results drove a flurry of analyst upgrades: of 9 analysts currently covering the stock 6 rate it “Buy” and two “Strong Buy”.
On October 20, 2021 the Department of Justice sued Google, accusing the ad giant of “unlawfully maintaining monopolies through anticompetitive and exclusionary practices in the search and search advertising markets”. Trade Desk management has stressed that “we have been, we are, and we expect to continue to do very well regardless of Google's policy choices”, but a decision against Google could drive an immediate and dramatic increase in value for $TTD.
$TTD’s valuation reflects its growth rate. It is not a cheap stock: it’s currently priced at over 40x sales. If the Company continues on its current trajectory, though, its growth prospects are almost unlimited.
What the risks are:
The Trade Desk operates in a highly competitive business, and its competitors include Google and Facebook, two of the largest companies in the world. There’s no assurance that $TTD can maintain its competitive position.
Targeted advertising requires tracking of behavior. This process is vulnerable to regulations designed to protect privacy. Further privacy regulations could affect the Company’s ability to deliver high-value targeted advertising to its customers.
Data breaches or other security issues could compromise confidential data, damaging the company’s reputation and affecting its results.
$TTD’s valuation is built on the assumption of continued dramatic growth. Any reduction in growth rate could have a significant impact on the stock’s value.
Bottom line: The Trade Desk is a fast growing company trading at a somewhat daunting valuation. Even investors who think the valuation is excessive might choose to stay alert for dips driven by overall market conditions.