When DataDog (DDOG -2.91%) reported earnings mid-February, investors seemed to yawn at the results. But Motley Fool contributor Brian Stoffel argues the numbers deserved a lot more positive attention than it got.
In this segment from Feb. 12, he shows how DataDog is leveraging the power of the software-as-a-service (SaaS) business model. Even though management does a good job of pointing out how customers are using more than one tool that Datadog offers, his two graphs put things in a different perspective and explain why he's such an enthusiastic shareholder.
Brian Stoffel: This is what gets me really excited. These are all the different tools that a company can use if they decide to sign-on with Datadog. So infrastructure -- how is my cloud functioning; Log management -- everything that happens is going to create a log; Network monitoring, real user monitoring, the synthetic monitoring, incident management, this is their latest tool.
I love the example that one of the CEOs of an incident management company gave, which is, "I go to buy a T-shirt of my favorite NBA team and when I click "Buy", I get the wheel of death, that says that I can't buy it." That's what incident management is. That's one example of what it is.
So they went from having one tool to now nine are live and pretty soon 10 tools that will be live. That's what optionality is. That's when you have multiple ways to fulfill your mission, and that is the secret sauce of SaaS or software-as-a-service companies. If you give a company your software and they come to use it and rely on us and depend on it, you can study what is working for them and what isn't, and create a new product that will help them; and because they are already a customer, it's a much easier sale than if there are brand new customer. I'm going to come off the screen for one second.
Here is the thing that I really want to highlight, and I wish these other companies did it. They tell us that they went, they grew their customer base by 35 percent. Then they say, well last year at this time, of those nine or 10 tools that you saw, 58 percent of them were using at least two of those products, and now 72 percent of them are.
You're like, "Wow, 58-72, that's pretty good." But what our brains don't do because we didn't evolve to be able to do this kind of complicated math is we say, that's 58 percent of a much smaller number and 72 percent of a much bigger number, and they said the same thing when it comes to using four or more products.
Last year, 10 percent of customers used four or more of all those products that I just showed you. This year, 22 percent do. Again, 10 percent of a smaller number, 20 percent of a bigger number. So what does that mean when we actually do the math?
Here's what it means. It means that customers with two-plus products went from just over 6,000 to well over 10,000. That is 68 percent growth in terms of customers who are using two or more products. These are approximate numbers because they just gave around percentage. I'm sure that if you ask them, these aren't the exact numbers, but it gives you a good enough idea.
Customers with four or more products went from just over 1,000 to well over 3,000. It almost tripled, the number of customers that are using 4+ products.
Here's why that's so important. I really believe that a moat and optionality are the key to long term investing gains. The moat is your downside protection. The moat here, it's kind of twofold. One, is high switching costs. Brian, if I'm a company and I'm using Datadog for four or five or six or seven of these functions, they're going to really have to screw up to get me to change because that's going to be a pain in the butt. Because not only we will I have to change, I'll have to make that transition but something could happen during the transition. I have retrain all my employees during the transition. I have to change how I pay my vendors during the transition. I don't want to change. The high switching costs are pretty high, but there's also network effects. The more customers they have, the more they learn, the more they learn the better the products that they can offer. Then in terms of optionality, that's your unlimited upside. Four years ago they had one product. Four years later they've got nine, about to have 10 products, where will they be in 2025? I don't know, but I bet it's going to be more than 10 products. That's what I really like about it.
