The story begins in 1999 -- a one-bedroom apartment in the Telegraph Hill neighborhood of San Francisco. That's when a young Marc Benioff foundedSalesforce.com(NYSE:CRM).<\/p>\n
This was the modern beginning of the software-as-a-service (SaaS) business model. Instead of paying big bucks at a brick-and-mortar location for a software package, customers could pay a much lower monthly fee for access to software via the cloud.<\/p>\n
Image source: Getty Images.<\/p>\n
It took a long time for the business community to catch on. But over the past five years, few publicly traded companies have seen their stocks skyrocket quite like SaaS players.<\/p>\n
But the market is evolving, and it won't be that way forever. A select few SaaS stocks will be emerging from the pack. I suspectDatadog(NASDAQ:DDOG) will be one of them. And I'm putting my money where my mouth is.<\/p>\n
Here is a simplified version of the nuts and bolts of the SaaS business:<\/p>\n
Perhaps its not surprising, then, that some of the biggest winners of the past four years have been SaaS players. An ETF that follows the sector --PowerShares Dynamic Software ETF(NYSEMKT:PSJ) -- has vastly outperformed the S&P 500 index.<\/p>\n<\/p>\n
PSJ Total Return Price data by YCharts<\/p>\n
At one point, it truly seemed that if an SaaS company went public, it meant big gains for investors.<\/p>\n
But in the evolution of any business model, shifts occur. That's what I believe will soon start happening within SaaS.<\/p>\n
Think of it from the perspective of a chief information or operating officer: You've got all of these different SaaS tools, which are great. But with each passing year, you're adding new ones -- one to monitor security, another to make sure your apps are working as they should, a third to run your website. It's enough to make your head spin.<\/p>\n
That's why I think there will soon be consolidation within the sphere. While a CIO could go out and get the best tool for each specific need her company has, I suspect that won't be the standard approach. Instead, the SaaS company that can provide abroad enough umbrella, with \"good-enough\" serviceswill be the ultimate winner.<\/p>\n
The simplification of dealing with a single platform, a single customer-service representative, and a single monthly billing will -- I suspect -- be enough to outweigh any efforts to optimize each individual software code.<\/p>\n
That's one reason I'm very bullish on Datadog. The company has tools that can do a wide range of tasks, including:<\/p>\n
During the most recent earnings call, management also announced it had released a security monitoring tool -- essentially signaling that it would soon include cybersecurity under its umbrella of tools.<\/p>\n
This wide umbrella is paramount only because the company is growing so fast. Datadog isn't just creating tools in an attempt to lure new customers -- it is upselling existing ones in an effort to get them to dump their single-use SaaS providers.<\/p>\n
In essence, Datadog is transitioning from an SaaS provider to a PaaS (platform-as-a-service) provider, where users can choose from several software solutions.<\/p>\n
The results over the past three years speak for themselves.<\/p>\n
Data source: SEC filings. ARR = annual recurring revenue. Growth rate = Compounded annual growth rate, or CAGR.<\/p>\n
That's stellar growth. One reason for it: Customers not only stick with Datadog for the long haul, they upgrade to include more tools over time. The proof: The company's dollar-based net retention rate has been above 130% for 10 consecutive quarters.<\/p>\n
By filtering out the effect of new customers, this metric tells us that existingcustomers increase their spending by at least 30%every yearwith Datadog.<\/p>\n
That's astounding. It's also what I believe will continue to happen with companies that have enough \"good-enough\" SaaS tools under one umbrella.<\/p>\n
I already own Datadog shares in my family's portfolio, but given the trends that I see emerging, I will be adding to our position as soon as Motley Fool trading rules apply.<\/p>\n
If you're interested in fast-growing cloud companies -- and have the stomach for the volatility that can accompany richly valued stocks like Datadog -- you should consider doing the same.<\/p>\n
<\/p>\n
The rest is here:<\/p>\n
The Evolution of SaaS -- Why Datadog's Growing Umbrella Makes the Stock a "Buy" - Motley Fool<\/a><\/p>\n","protected":false},"excerpt":{"rendered":" The story begins in 1999 -- a one-bedroom apartment in the Telegraph Hill neighborhood of San Francisco. That's when a young Marc Benioff foundedSalesforce.com(NYSE:CRM). Continue reading