I found something interesting sniffing around the latest Duquesne Family Office 13F filings. Former Soros protege, Stanley Druckenmiller tripled his stake in Datadog, a SaaS monitoring and analytics platform.
Why would a billionaire be buying a high growth stock in a rising interest rate environment?
The first clue lies in the DDOG share price. While other high growth stocks have taken a huge tumble this year – Affirm is down 83%, Upstart is down 86% – DataDog is comparably outperforming its high growth peers, down 49% year to date at the time of research.
That relative outperformance is a sign that perhaps Datadog has stronger fundamentals and might bounce back better than its peers when the tide turns. To find that out, we need to look under the hood.
Fast Growth In Terrible Economy
One of the reasons other high-growth companies have tumbled so much is their revenues have slowed. For example, Affirm’s revenue growth fell from 70.7% year-over-year in Q2 2021 to 39.1% a year later; it further fell to 34% in its most recent quarter.
Similarly, Upstart has experienced rapid deceleration in growth on a year-over-year basis. Its growth was an astonishing 896% in Q2 2021 and plunged to -29% in its most recent quarter.
So if the economic climate is punishing revenue growth rates of other high-flying firms from 2020-21, how is Datadog faring in this rough and tumble economic environment?
Pretty well, as it turns out.
Over the past year and change, revenue growth has remained very impressive.
- Q1 2021: 51.3%
- Q2 2021: 66.8%
- Q3 2021: 74.9%
- Q4 2021: 83.7%
- Q1 2022: 82.8%
- Q2 2022: 73.9%
- Q3 2022: 61.4%
As you can see – unlike its high growth peers – Datadog is maintaining rapid year-over-year growth rates in spite of a poor economic climate.
Better yet on the financial side, operating income is hovering around breakeven, suggesting that management has good control over its expenses and is heavily investing in the future at the expense of current profitability.
Critically, however, management is not digging a deep hole on the expense side and racking up big losses (look no further than Meta and how Zuckerberg’s big metaverse bet is panning out for shareholders).
A look through the company’s most recent 10-Q reveals more reasons to be optimistic. The company reports that 4 out of 5 clients use more than one product, attrition is low, a broad customer base results in low concentration risk, and a plan to expand overseas.
The international component is critical to current shareholders because it’s often underestimated by investors. Take a company like Alphabet (formerly Google) as an example of how overseas expansion can be a massive growth lever. First the company dominated the US but as it built a presence in just about every country on every continent it was able to sustain rapid growth year-over-year for decades.
When investors first evaluate a company, they often do so through the lens of the domestic market. How fast is the company grabbing market share at home? Rarely do the initial financial models build out growth expansion overseas. Yet a high quality product, like Google Search, or in this case Datadog can lead to fast adoption in international markets, which adds a tailwind to share price as the years go by.
So why is a billionaire with an A+ track record betting big on a high-growth stock in a rising interest rate environment? Because the economic headwinds affecting other firms don’t seem to be impacting Datadog’s growth in any meaningful way at all.
Plus, you would be surprised how few investors actually read 10-Q reports, and what management has revealed recently is it plans to go overseas aggressively, and that’s likely being under-represented by investors at large in their financial models.
Time will tell if Stanley Druckenmiller is right. But for now, what we can see is he has a lot of conviction in his position by tripling it over the past quarter or so.