Up 205% Since IPO, Why Generative AI Could Boost Datadog’s Stock Price

Investors tend to reward companies for beating their expectations and raising guidance every quarter. Sadly, it’s impossible to predict with certainty whether a company will do that.

Another way to look at companies is to examine their CEOs. I’d argue investors could do well by placing bets on CEOs who have led their companies from idea to IPO and beyond.

One such CEO is Olivier Pomel, since 2010 he has been cofounder and CEO of Datadog, a New York City-based provider of cloud monitoring and security products. Earlier this month, Datadog delivered faster than expected growth and boosted its guidance for the current quarter.

In a November 16 interview Pomel shared how he came to be among the 0.4% of founders who are still CEO with a controlling stake three years after they take their companies public.

Datadog’s Boffo Third Quarter Results

Datadog’s platform monitors the performance of their customers’ cloud-based computer applications. On November 7, the company reported faster-than expected growth — sending its stock price soaring 28%.

Datadog is one of a few companies able to quantify how much Generative AI is contributing to growth. As Pomel told analysts during a conference call, “AI-native customers” contributed 2.5% of Datadog’s annualized revenue during the quarter, CNBC reported.

Here are the key numbers from CNBC:

• Q3 revenue: $547.5 million, up 25%h and $23.4 million above LSEG estimates
• Adjusted earnings per share: 45 cents — 11 cents per share above estimates
• Q4 revenue guidance: a range between $564 million and $568 million — the midpoint of which is about $23 million more than LSEG estimates
• 2024 Revenue guidance: $2.1 billion — $40 million ahead of estimates according to LSEG

Datadog’s Q4 guidance was the strongest of 2023. The company — whose cloud monitoring and security products work with Amazon Web Services, Google Cloud and Microsoft
MSFT
Azure — suffered a sharp drop in its stock in August after lowering guidance as companies reduced their cloud spending, CNBC noted.

From Co-Founder To CEO Three Years Post IPO

Pomel has led Datadog from its founding to its IPO and four years beyond. Since going public in September 20, 2019, Datadog stock has soared 205% — outpacing the Nasdaq index which increased 74% between September 20, 2019 and November 17, 2023.

(Sadly — like many technology stocks that peaked in early November 2021 — Datadog shares ended November 17 about 43% below their peak of $194 a share.)

CEOs like Pomel are rare. However, only after I began interviewing more than 30 such leaders did I identify what separates them from their peers: Their insatiable desire to learn and solve new problems – I call it cognitive hunger — protects them from cognitive lock-in — a process by which some leaders block out information that conflicts with their strongly-held beliefs.

Managing Growth Through Cognitive Hunger

Cognitive Hunger infuses five growth processes. Here’s how Pomel managed these five growth processes at Datadog:

• Solve the right problem well, To turn an idea into a public company start by building the best solution to a painful problem that rivals – especially very large ones – are ignoring. Pomel cofounded Datadog to solve a problem causing pain for many companies. Pomel and his cofounder, Alexis Lê-Quôc, experienced the challenges of collaborating across different departments. At their previous company, Wireless Generation (an education technology company that News Corp acquired in 2010, according to the New York Times), Pomel led engineering development while Lê-Quôc headed technology operations. In starting Datadog, they asked ‘How do we get the teams to work together?’ That was the problem Datadog was trying to solve,” Pomel told me. In 2010, they did not expect the cloud to become the world-changing trend into which it ultimately evolved. They aimed to build a solution to the problem: “to bring operations close and to cut cycle time and reduce barriers. Cloud transformation turned out to be bigger than we thought,” he told me.
• Win and keep customers. To demonstrate they have solved the right problem well, leaders must win and keep customers. In 2010, investors doubted Datadog would succeed so rather than rushing to raise capital, the company met with potential customers and built a product they would love. As Pomel said, “We were obsessed with solving the real problem. We spent time with financial customers; we went to conferences and gave demos. We met a lot of potential early customers. When we built the product for the first paying customer, we knew them from our previous company.” Datadog discovered an unmet need and collaborated with customers to develop new products. “People said, ‘Heh, I need that.’ he told me. Those collaborations boosted Datadog’s revenues. Most Datadog customers used many different products to monitor their operations. Ultimately, Datadog created loyal customers by saving them time and money. “They started small with us and three to five years down the road they eliminated 10 to 15 other products — they used Datadog,” Pomel told me.
• Surf industry tailwinds. Business leaders must adapt quickly to rapidly changing growth headwinds and tailwinds. Datadog has monetized the recently expanding wave of demand from Generative AI. “Our customers include producers of large language models for video and software development tools,” he said. Datadog can quantify how much revenue Generative AI is adding. “In our latest investor earnings call, we said 2.5% of our revenue came from AI,” Pomel explained.
• Invest in growth opportunities. If a company rests on its laurels, it will ultimately lose ground to rivals that invest in growth opportunities. Datadog is operating efficiently so the company can invest in new products for its customers. “We want to make room to spend 30% of revenue on investing in new products for our customers,” he said.
• Develop the next generation of leaders. Business leaders who want their companies to make a difference in the world must invest in the next generation of leaders. Datadog has done that by building a low-ego culture and encouraging its talent to keep growing. Datadog aims to minimize drama and build products customers are eager to buy. “Our culture is to be low on drama. We are here to learn. We want to help people build good products for customers. They should love our products,” Pomel said. Datadog also aims to keep smart people from plateauing by maintaining high standards. “if someone tells you that something isn’t right, it’s important to accept that feedback and do it again,” he concluded.

Manage A Public Company

Founders who want to keep running their company after it goes public must learn new skills. Pomel learned about scaling an idea from his eight years at Wireless Generation. “I went from an engineer to scaling a team. At my previous company, I was waiting eight years to get a green card,” he said.

Pomel noted, “I thought I was wasting time for too long. Looking back those were very formative years. I made mistakes and it took me years to understand them.”

Datadog went public nine years after it was founded. Pomel had to learn how to let go of his desire to control everything and he surrounded himself “with peers on my management team.”

Before the company went public, he was dealing with the board which he said is “a proxy for markets and investors, customers, and employees.”

After the IPO. Pomel learned to set expectations so people do not focus too much on the short-term fluctuations in the company’s stock price. He also learned to build trust with investors by giving conservative guidance and meeting or exceeding expectations.

What’s Next For Datadog Stock?

Datadog stock is not far from investors’ target price. The average price target for Datadog is $114.52 per share based on 27 Wall Streets analysts 12-month price targets according to TipRanks. Based on Datadog’s November 17 price, the price target represents 4.64% upside.

The surge in its shares following Datadog’s third quarter report came as a relief to one analyst. “Into the print there was a lot of anxiety about whether Datadog would follow AWS to improving QoQ growth and stable YoY, or demonstrate a worried disconnect and continue to decelerate on a YoY basis,” Bernstein Research analysts led by Peter Weed wrote in a November 7 note. Weed added, “Datadog emphatically dispelled these worries,” CNBC reported.

Pomel sees a bright future for the adoption of Generative AI to boost demand for Datadog’s products. “Generative AI is now very expensive to train and operate. We think open source models will be used more widely for copy generation, imagine generation, and coding. These applications are creating real productivity gains,” he told me.

Yet he sees high expectations as a risk. “Most companies are not in production,” he said. Pomel added. “It might take longer than people expect but it will be massive. Training models is a game of scale and that will persist depending on how quickly open source models are more widely adopted.”