Warren Buffett has always told investors to "be greedy when others are fearful," and that is exactly what Jim Simons and Stanley Druckenmiller have been doing. These two big investors have been going on a shopping spree recently, taking advantage of the fact that the market has fallen 15% so far this year -- its largest year-to-date loss since 2008.
Both Druckenmiller and Simons have been buying stocks, but there is at least one overlap: Datadog (DDOG -1.06%). Druckenmiller has bought nearly 790,000 shares of the application monitoring company over the past few months, while Simons' Renaissance Technologies has added almost 331,000 shares. These purchases total $82 million and $37 million, respectively.
Why are two of the world's most famous investors excited about this tech stock? Let's find out.
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The stock has been a dog...
Shares of Datadog haven't had a great 2022. The stock has fallen 58% so far this year, which is in line with most tech names. The company provides tools to help businesses monitor application and infrastructure performance. Considering most tech stocks have gotten crushed in 2022, it makes sense that Datadog has followed suit.
Its valuation isn't helping out, either. Even after this notable price drop, shares still trade at a hefty valuation of 66 times free cash flow. At the end of last year, this company was trading above 300 times free cash flow.
...yet the business continued to flourish
However, some investors might be throwing this baby out with the bathwater because Datadog has continued to impress while many other growth stocks have slumped. Most notably, the company's top-line expansion rate has remained stable throughout 2022. In Q3, Datadog posted an incredible 61% year-over-year revenue increase to $437 million. Additionally, the company's net loss has improved; it now sits at just $14 million over the trailing 12 months -- notable progress from the year-ago period, when it was closer to $40 million.
Continued adoption is likely because the company's services are crucial to business success. All businesses, no matter the economic environment, need to monitor application and infrastructure performance. Datadog also provides business insight to advance time to market for new products and decrease application downtime. In other words, Datadog is vital to customers, so it's no surprise the company has held up well during this environment.
Not only are customers not leaving the platform, they are continuing to spend increasing amounts with Datadog. Churn has remained in the mid-to-low single digits in Q3, and for the 21st consecutive quarter, the company's net retention rate has remained above 130%. This stability is almost unheard of among software companies in 2022, so it's no wonder that billionaires have been loading up on shares.
This dog still has a lot of bite left
According to Gartner's research, Datadog is the leader in this space, and a likely cause is the company's constant innovation. In 2022 alone, it has released 10 new products. And with almost $364 million in trailing-12-month free cash flow, this innovation is unlikely to stop. Importantly, Datadog is generating more cash than other top-tier rivals in the space, so the company can innovate faster than its peers.
This continuous product development is likely why the company has seen such strong customer expansion. With constant creation, it's easier for customers to become more reliant on the company. Therefore, it should come as no surprise that 16% of Datadog's customers use six or more products as of Q3, which is up from 0% just two years ago.
The company is in a fantastic position to thrive over the long haul with a sustainable competitive advantage in a lucrative industry. What's even more exciting, however, is that this industry is projected to get much bigger. By 2026, the market is expected to be worth $62 billion, far higher than the current addressable opportunity of $41 billion.
With a fast-growing space and an innovative leader, it makes sense that billionaires are piling into this stock, despite its valuation. Given Datadog's appealing prospects and the sustainable competitive advantages to enable the company to capitalize on them, long-term investors might want to follow suit and buy this business now and hold for the long haul.
