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Valuation Thread for $DDOG
Yesterday I shared some of my thoughts on $DDOG (you can find the thread at the bottom of this thread).
Today, I will be walking through why I don’t necessarily think that it is over-valued, even at these nose-bleed levels (60x sales!)
Yesterday I shared some of my thoughts on $DDOG (you can find the thread at the bottom of this thread).
Today, I will be walking through why I don’t necessarily think that it is over-valued, even at these nose-bleed levels (60x sales!)
First, let me start by saying that I do not yet own shares of $DDOG. I am hoping to begin a position sometime soon, though. Also, I am not offering any sort of advice here. I am just sharing my thoughts and opinion on $DDOG and how I got to it.
My valuation case begins with one question. Can $DDOG be a long-term winner in the space? If so, which company would it model after? I am impressed with the $DDOG business model and leadership. I think it has incredible growth potential. Could it be the next $CRM?
I know that it is audacious to model $DDOG after arguably the most successful SaaS company in the world, but that is what I am going to do. I also know that it is somewhat ridiculous to run a 15-year DCF.
My reasoning on the DCF is not that I will perfectly predict the FCF fifteen years from now, but we all know that $DDOG must have incredible growth to warrant this valuation. I used the DCF to figure out approximately how much growth it really requires.
I modeled the revenue growth of $DDOG to roughly match the growth of $CRM when it was at a similar point in its growth cycle. The fifteen year CAGR is 30.78%.
Do you think that this is absurd? Maybe it is, but $CRM had a CAGR of 41.79% over the period I am comparing $DDOG to. If anything, this model is conservative compared to that.
There are some other inputs in the model that I should address. I have not assumed an improvement in gross profit margin. I have assumed SG&A expenses decrease as a percentage of revenue to 42% by year 15. This is lower than $CRM due to a less costly sales approach.
I have assumed R&D expenses stabilize at 20% by year 15. This is higher than $CRM because IT management may require more innovation.
$CRM has about 20% marketshare in its market. This model projects $DDOG having about 25-30% marketshare in IT operations management by year 15.
$CRM has about 20% marketshare in its market. This model projects $DDOG having about 25-30% marketshare in IT operations management by year 15.
Here are the results of that DCF:
If you have any questions about my inputs, please ask. If you disagree, I’d love to hear why. I love talking stocks and debating valuation.
If you have any questions about my inputs, please ask. If you disagree, I’d love to hear why. I love talking stocks and debating valuation.
The 40x EBITDA multiple may seem high, but for the comparable year 15, $CRM was trading at a 99x EBITDA multiple. I risk-adjusted it down partially due to $CRM’s multiple since dropping to 48x.
So what does this mean? If my assumptions are correct, I would expect $DDOG to be a 4 to 6-bagger (with a bit more upside) over the next fifteen years. I am interested in this stock for the ultra long-term. It also has the potential to fall fast if it does not meet expectations.
When I start a position in $DDOG, I will start small and add to it over time, hopefully to get in at some better prices in the future. However, if this turns out to be an all-time low from this point forward, I don’t want to completely miss out on a great company.
This has been a lot of information, so I am going to stop here, but I am really interested in hearing what you think. Feel free to disagree! I know that I have put on my optimist hat, but I don’t think that I am quite in fairytale land. Thanks for reading and enjoy the weekend!
My previous $DDOG observations thread: https://twitter.com/IanGrayLive/status/1273707966194003969?s=20
