Datadog: How Datadog’s S&P 500 Debut Changes the Game for Investors
Datadog isn't just another software company. It's a capital-light, founder-led, high-margin compounder powering the infrastructure of modern digital enterprises. In a world of microservices, cloud complexity, and AI-native systems, Datadog has quietly become essential.
The Investment Thesis
Mission-critical platform: Observability, security, cost optimization—all in one.
Founder-led: Olivier Pomel and Alexis Lê-Quôc still own 5%+ worth $5.2 billion.
High-margin, low-capex: 80% gross margin, 1% capex-to-revenue.
Index tailwind: Inclusion in the S&P 500 compels index‑tracking funds to buy the stock, typically raising its share price.
Expansion engine: 83% of customers use 2+ products; 51% use 4+.
Underpenetrated TAM: Global cloud spend is set to exceed $1.2T by 2028.
How They Make Money
Datadog monetizes a full-stack observability platform via:
Usage-based + subscription pricing
Infrastructure monitoring, APM, Flex Logs, Database Monitoring
Modular expansion: Start small, scale quickly.
88% of ARR comes from customers paying $100K+, with strong upsell momentum.
Management & Culture
Founder-led since 2010
Rejected $7B offer from Cisco pre-IPO
Took the company public in 2019 at $8.7B valuation
Olivier Pomel (CEO) and Alexis Lê-Quôc (CTO) still own ~$5.2B in equity
Source: Forbes. Datadog cofounders Alexis Lê-Quôc left and Olivier Pomel right
They’re not hired guns—they’re owners.
Capital Allocation
Strategic M&A: Acquisitions align tightly with core platform
Redeemed $635M in convertible notes
Heavy reinvestment in R&D and AI features
Datadog’s 5-year average returns are weak but it’s improving:
ROIC: –3.6%
ROE: +0.5%
ROA: +0.4%
The playbook: Build, buy smart, and embed deeper.
Profitability
Free cash flow margin: 32%
FCF conversion: 543%
Gross margin: 80%
We're seeing a positive trend in earnings, and real cash flow continues to come in, which we plan to reinvest into our innovative projects.
Competitive Advantage
Switching costs: Mid-to-high 90s gross retention
Network effects: 5,000+ customers using next-gen products
Intangible assets: Trusted by 7,500+ security clients, including 50% of Fortune 500
Platform advantage: One-stop cloud operations hub
Moat? It's strong—and it’s getting wider.
Source: silvercrosscapital.com
Valuation
P/E (NTM): ~80x
P/FCF: ~53x
DCF-implied upside: ~21% that imply 26% future growth.
Not cheap, but quality rarely is. It’s about sustained excellence, not bargain bins.
Balance Sheet
$2.6B net cash
Interest coverage: 9x
Debt-to-equity: 0.6
Goodwill/assets: 6%
Strong, self-funded, no red flags.
Market Potential
$9.4B cloud monitoring TAM by 2030
Under 20% penetration by 2028
Secular tailwinds: AI, DevOps, hybrid cloud
🌐 Market Growth Snapshot (2020–2028):
🔍 Observability: $53B today, growing at 11% CAGR
🛡️ Cloud Security: $26B, fastest-growing at 16% CAGR
☁️ Public Cloud: $600B behemoth, doubling at 20% CAGR
Observability is still early—and Datadog is leading.
Performance Comparison
+290% total return since IPO (22.3% CAGR)
Outpaced Dynatrace (+142%) and Elastic (+24.3%)
Datadog has created serious long-term value for shareholders.
Risks
Valuation risk: High multiples demand perfect execution
Macro headwinds: IT budget pressure, rate shocks
Competitive pressure: AWS, MSFT, startups
AI volatility: Big upside, but evolving regulation and risk
Great business. Not invincible.
Conclusion: Buy the Backbone
Datadog is what happens when visionary leadership meets elite capital efficiency. Founders are still in charge. Customers locked in. Margins high. Moat growing.
Yes, it’s expensive. But the best compounders usually are.
We rate Datadog 78%. For long-term investors seeking durable, scalable software exposure to AI, cloud, and infrastructure: Buy.
SCC Rating: 78%
Recommendation: ✓ Buy
"You don't sell the rails in a gold rush." Own the platform. Own the future.
Disclaimer: This is not financial advice. Do your own research. Investing involves risk.
For more indepth research please visit www.silvercrosscapital.com
