Hi All. I apologize for the relative radio silence recently. Travel out of state, harvest, a big presentation, two teenagers, and life in general have kept me sequestered and feeling sometimes like I’m breathing from a straw underwater.
DDOG IPO!! Wow, what am impressive debut…shooting right past $30 and up to $40 yesterday at the open. I was able to pick up a small 1.5% position in DATA yesterday on their IPO later in the day at $37. Make no mistake, this is a VERY highly valued IPO, many would say TOO high, but I like this company enough to want to own a small position and see where they go from here based on some, frankly, incredible and blistering growth. To clarify, they come out of the chute after day 1 of trading at a very high $11B valuation, which is roughly 24x EV (Enterprise Value) of forward revenues. That is higher than many of their peers and many of the companies in my portfolio, including MongoDB, one of my favorites and my second largest holding that makes up 11% of my portfolio. That said, their revenue growth is also among the highest of any company I own at 82% growth last q/q. This type of continued growth will quickly slice that high EV in half. Also extremely impressive is their dollar-based retention rate, which was an incredible 146%. This is a metric that measures how much they made from each existing, past customer in the following year. You want this to be 100% at least, showing that they are maintaining at least the same amount of spend from existing customers, but when you see 146%, it means DDOG is upselling those customers and on average those existing customers are spending 46% more!! DDOG has over 9000 customers in 100 countries and their estimated forward revenue estimate is $426 million, so they are not a flash in the pants, small player.
What do they do?? Datadog focuses on infrastructure monitoring and application performance monitoring. They are not a sexy tech company, but they provide the picks and shovels of the cloud and are critical to monitoring the many software stacks needed in every company today and insuring performance, reliability and integration in the cloud. Even better, they are platform agnostic, meaning they function equally well on Amazon’s AWS, Microsoft’s Azure, Google’s Cloud and any companies own private network. And once installed, they are incredibly “sticky” and hard to uninstall…which equals high recurring revenues and high dollar based retention rate. TAM is an acronym for “Total Available Market” (or also called “Total Addressable Market”). DDOG is early to this game and estimate they have penetrated less than 1% of the total potential $35B TAM. Unlike many fast growing companies going public now, they were profitable in 2018, before choosing to increasing their marketing and sales spend to ramp up their customer acquisition; in 2019 they are still very close to break even in both free cash flow and profitability. Indeed, last week just before going public, Cisco Systems liked them so much they tried to swoop in and buy them for $7B, which offer was quickly rejected. After the IPO proceeds, they have a very healthy $664 million in cash and equivalents. I have to repeat my initial statement above that this is a VERY expensive valuation for any company by any metric; but the said, for a company well positioned, growing incredibly fast, and certainly in the sweet spot of the digital revolution, I am willing to place a small 1.5% bet they will continue to post incredible growth the next 4 quarters, as they have plenty of room to grow and an incredible track record to date. The stock price is up only slightly today at around $37/share from where I bought it yesterday and, I feel, a worthy addition to round out my one dozen company holdings. I will reiterate that I only invest in companies I feel can 5x themselves, ones that I plan to hold for a LONG time (minimum 1 year and hopefully more than 5 years) and that have this type of blistering revenue growth and are a leader in their particular field with high recurring (subscription) revenues that virtually guarantee future continued growth. I feel DDOG may be all of those and will continue to monitor their story and their growth; if and as they continue to prove my thesis correct, I may add several tranches to my initial small position in the future.
Quick update after the Armageddon-like sell off of the SAAS stocks the past 3 weeks that has scrambled the percentage holdings of my portfolio and caused me to re-analyze my holdings and which companies I expect to recover faster and/or continue growing (again, based on my own % holdings). I have opportunistically sold some shares of a few holdings and transferred the proceeds to other companies I have more conviction in and like better right now. It is critical for you to recognize that just because I may add to one of my tiny holdings like PINS or DDOG on any given day, that does not mean that those are my favorite companies right now; the decision has to be looked at in the context of the overall portfolio and the % holding of each company. For example, I sold another chunk of SQ and a small portion of my TWLO holdings (both in my IRA to avoid the tax consequences) to pick up some DDOG in their IPO and to add to my PINS my ZS positions. This is simply a rebalancing of the portfolio based on new information, the recent drop, and my perception of my own allocations combined with the future growth of the companies relative to one another. All that said, and to be crystal clear on something as you can see in my portfolio allocation I will post below: AYX still has my highest conviction and I think the opportunity right now to add shares at this discounted level (28% below the high) is a good one if you have been waiting to buy it, or do not own it. If it was not already 18% of my portfolio allocation, I would be adding to it here more than any other company I own.
You may note that my AYX percentage allocation is considerably smaller than the last time I posted. It had ballooned up to 23% of the overall portfolio. As the stock price grew and became more than 20% of my portfolio I followed one of my rules and sold a small position to bring it below 20% again. It was complete luck and good fortune that I was able to sell at almost the stock high, which had nothing to do with the performance of the company or my conviction in AYX, so much as my own rule that I don’t like any one position to become too large a portion of my overall portfolio. In my case, this was a good problem to have and due entirely to its incredible increase in price YTD….it’s important to note that most of my AYX position was purchased in the mid-20s, with some follow-on purchases in the 30s as I gained more conviction. I believe this stock can still double from here!
