Is Enterprise Software Cooked?
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DataDog Q1 FY12/25 Earnings Review
When DataDog ($DDOG) first hit the public markets I remember saying to folks that it was one of the best set of enterprise software financials I had ever seen. And I have seen a lot of enterprise software financials. The blend of revenue growth (>50% for a long time), cashflow margins (>15% for a long time) and the sheer weight of the order book vs. TTM revenues was off-the-chart good.
Inevitably as this don’t-say-point-solution-point-solution vendor has matured, things have cooled off some, but so too has the valuation and so all things being equal, there is no reason to not want to own DataDog in a long term account and there would be no reason to worry too much about its longevity. If all other things were equal I would be saying, well, point solutions tend to either wither and die over time, or be acquired by suite providers; and that my money would be on DDOG selling the ranch to a bigger friend at some point.
The trouble is that all things are most certainly not equal. Because, you know, AI. The endpoint for the systems monitoring segment is self-healing software and (more difficult) hardware systems wherein the don’t-say-it’s-sentient bot has one set of code out spotting problems and another re-writing the troublesome routines as a workaround before (one day) paging the three remaining datacenter engineers to come fix the RJ45 port that only broke because a cursed human was messing with it yesterday.
Now this isn’t going to happen tomorrow, and plenty of roadblocks will be thrown in the path of this progress. Many thousands, maybe millions, of technology engineering and support jobs are under threat from AI and you can bet that the response amongst the bot’s quarry will be (1) a small elite group of them, the modern incarnation of the bourgeoisie, will learn to control and ride the machine but (2) the vast majority, the unaware, the New Lumpenproletariat, will wonder wait, wut? as their pink slip arrives by DM straight from the HR bot. And then all the tech people will know how the manufacturing and mining people felt this last half century.
But that is the endpoint for sysops; and if you think about enterprise software at large, it is largely about automating workflows between large numbers of people. Some of those people are more difficult for AI to replace, some easier. But the enterprise is going to have less people and on the current pricing model for most of enterprise software that means less money for software companies. It also, by the way, means that the current generation of Oracle Cubs is at threat from a swarm of API-first vendors that most of us have not even heard of yet. If you don’t need to interact with many people, you don’t need a people-first UI, and if you don’t need a UI then all of a sudden software gets a lot simpler to write. Which means machines can write more of it. You see where this is headed.
So, if you want to own DataDog I would not try to persuade you otherwise. The path to the future is never direct and the time to get there is usually longer than any technology-minded person thinks. But me? I am steering clear of enterprise software personally. For one day the singularity is coming, and when it does? It still needs semiconductor and it still needs RJ45 ports. But it doesn’t necessarily need today’s crop of APM vendors. Kudos to Splunk and Appdynamics for taking the money & running - I would expect Dynatrace ($DT) and Datadog ($DDOG) to be considering something similar on a real-time basis.
Numbers
Absolutely fine.
