Datadog Closes Out 2022 With Strength Albeit a Muted Outlook for 2023

We are maintaining our fair value estimate for narrow-moat Datadog after the firm reported a mixed quarter with strong financial results offset by guidance for 2023 that was materially short of our expectations. We believe that ongoing customer cloud optimization is the driver behind Datadog’s lower-than-expected 2023 outlook as customers batten down the hatches amid a tough macro environment. In this environment, we maintain a positive outlook on the business overall and still believe that Datadog is top of mind for customers looking for observability solutions. With that in mind, we view Datadog as attractively priced for investors seeking long-term, high-quality SaaS exposure.

Datadog’s top line for the fourth quarter grew 44% year over year to clock in at $469 million. We view growth of Datadog’s top line as a combination of two factors: upselling and cross-selling activity and new customer adoption. On the upselling front, Datadog maintained net revenue retention of more than 130%, implying significant additional spending from Datadog’s existing customers. We are also encouraged by signs of Datadog customers adopting additional modules as we believe it increases the firm’s switching costs over time.

On the new user front, Datadog’s total customer count expanded 33% year over year to 23,200. While growth has slowed down over the last few quarters, we still view Datadog’s new user addition numbers as impressive. With time, we are also seeing Datadog move upmarket with the composition of its annual recurring revenue, or ARR, leaning more toward larger customers. To end the fourth quarter, around 85% of Datadog’s ARR was composed of large customers (ARR of more than $100,000).

On the profitability front, in the fourth quarter, Datadog reported adjusted margins of 17.7% and adjusted EPS of 0.26—both numbers exceeded our prior estimates.