Datadog IPO: Should You Invest?
Datadog, a cloud-based infrastructure monitoring service, filed its IPO paperwork on August 23. The company initially said it’s looking to raise $100 million in its IPO, but recent reports have suggested Datadog is targeting a $492 million IPO. Morgan Stanley and Goldman Sachs are the lead underwriters on the Datadog IPO, which will trade on the Nasdaq as DDOG. Datadog is expected to go public on Thursday, September 19.
What is Datadog?
What does a cloud-based infrastructure monitoring service like Datadog actually do? It mostly provides analytics. As companies move to the cloud and use more software, they need to better understand how their systems are performing. In the ever-growing world of cloud infrastructure, things can get messy with disparate analysis and information falling through the cracks. Datadog’s software organizes all those moving parts. Datadog claims to provide “a unified and real-time single pane of glass view into a company’s entire technology stack.”
Datadog is an infrastructure monitoring company at its core, but it also offers a full suite of products around log management and application performance monitoring. Datadog calls these three services “the three pillars of observability.”
Datadog was founded in New York in 2010. Since then the company has grown quickly. Datadog had the right product at the right time in the right market. By 2015 the company surpassed 1,000 customers, and by 2017 it surpassed 5,000 customers.
The company made $198.1 million in revenue in 2018. That’s up 97% year over year. Datadog ended last quarter with 8,846 customers across 100 countries. Headquartered in New York Datadog currently has 1,212 employees with a large contingent based in France.
Through the first six months of 2019 Datadog’s pulled in $153.3 million. That means the company is on pace for 79% year over year growth. Almost all of their revenue is subscription based, which gives it added stability. Of its 8,846 current customers, 594 of them are paying more than $100,000 in annual recurring revenue.
Datadog will issue 24 million shares at a price of $19 to $22 per share. This would give Datadog a $6.6 billion valuation according to broker Renaissance Capital.
As mentioned in our WeWork IPO analysis, IPO investing can be a risky endeavor. Nowadays, IPOs present more of an opportunity for institutional investors than they do for individual investors. The ordinary investor participates in an IPO because they fall for the hype surrounding the company. Generally speaking, IPO investing does not provide a great return.
However, the Datadog IPO could be different. Datadog provides a much-needed product that many prominent companies have already implemented and rely on. It has sound financial metrics. Most of its revenue is annual recurring revenue thanks to its subscription model. Underwriters Morgan Stanley and Goldman Sachs will put Datadog in a position to succeed. Datadog has all the tools to be a successful company for years to come.
Investors may have to pay a premium, but a Datadog IPO could be lucrative. Regardless, it’s imperative to understand the risk-to-reward potential before investing.