Due Diligence Checklist: Datadog (DDOG)

Cloud Observability & Monitoring | SaaS | Large-Cap

For: Intermediate investor, 10% position size, 3-year horizon
Key Concerns: Competition and customer churn
Estimated Time: 6-8 hours for thorough research
Difficulty: Moderate (sector-specific SaaS metrics required)

⚡ QUICK PRIORITY ITEMS (Do These First - 2 hours)

1. Profitability & Cash Flow Check

• Is Datadog generating positive free cash flow?
  • Where: SEC.gov 10-K → Cash Flow Statement
  • Current status: FY 2024 FCF was $775M (29% FCF margin)
  • Target: Positive and growing FCF
  • Green flag: $775M FCF on $2.68B revenue
  • Red flag: Declining FCF despite revenue growth

2. Debt Load & Financial Risk

• Is debt manageable relative to cash flow?
  • Where: Yahoo Finance → Balance Sheet → Total Debt
  • Current status: $1.3B debt vs $4.2B cash (Dec 31, 2024)
  • Green flag: NET CASH of $2.9B (cash exceeds debt)
  • Red flag: Debt/FCF >2x or increasing debt

3. Insider Trading Patterns (YOUR KEY CONCERN)

• Are insiders selling heavily or buying?
  • Where: OpenInsider.com → Search “DDOG”
  • Red flag alert: CEO sold $123.89M in shares Q1-Q2 2025
  • Red flag alert: 180 insider sell transactions, ZERO purchases in 6 months
  • Mitigating factor: Sales executed under Rule 10b5-1 plans (pre-scheduled)
  • Your assessment: Does this level of selling concern you? Yes/No

4. Competition Intensity Check (YOUR KEY CONCERN)

• Is DDOG losing market share to competitors?
  • Where: Gartner Magic Quadrant for Observability Platforms 2025
  • Current status: Leader for 5th consecutive year
  • Main competitors: Dynatrace (4.6★), New Relic, Splunk
  • Red flag: Competitors offering aggressive pricing

5. Churn & Customer Health (YOUR KEY CONCERN)

• Is churn accelerating or retention strong?
  • Where: Earnings call transcripts → Search “churn” and “retention”
  • Critical metric: Net Revenue Retention (NRR)
  • Red flag alert: NRR dropped below 130% in Q2 2023
  • Current status: NRR currently “above 120%” but declining trend
  • Mitigating factor: Gross retention in “mid to high 90s%”

DECISION POINT: If 3+ red flags above, seriously reconsider or reduce position to 5%.

1. FINANCIAL HEALTH (12 items - 2.5 hours)

SaaS-Specific Financial Metrics

• Rule of 40 Score

  • What: Revenue Growth Rate % + Free Cash Flow Margin %
  • Calculate: 26% growth + 29% FCF margin = 55%
  • Target: >40% is excellent SaaS health
  • Green flag: 55% Rule of 40 signals efficient growth

• Revenue Growth Trend (3-Year Review)

  • FY 2022: $1.68B | FY 2023: $2.13B (+27%) | FY 2024: $2.68B (+26%)
  • Target for SaaS: 20%+ sustained growth
  • Green flag: Consistent 25-28% growth at $2.6B scale

• Gross Margin Stability

  • Q3 2024: 81% gross margin
  • Target for SaaS: >75%
  • Green flag: 81% gross margin reflects strong pricing power

2. CUSTOMER RETENTION & CHURN (8 items)

YOUR PRIMARY CONCERN AREA

• Current NRR Trend (Last 8 Quarters)

  • Historical: >130% for 15+ quarters (through Q1 2021)
  • Q2 2023: Dropped below 130% for first time in 3 years
  • Current: “Above 120%” but declining trend
  • What’s causing decline: Customer “cost optimization”

• Gross Revenue Retention (GRR) - CRITICAL

  • Current: “Mid to high 90s%” per management
  • Target: >95% is excellent
  • Key insight: If GRR is 95%+ but NRR declining, problem is EXPANSION not churn

• Churn by Customer Segment

  • Management commentary: “Churn among smaller customers” but limited revenue impact
  • Enterprise churn: Appears low (gross retention mid-90s)
  • Green flag: Churn concentrated in low-value segments

3. COMPETITIVE POSITION (10 items)

YOUR KEY CONCERN AREA

• Market Position vs Key Competitors

  • DDOG rating: 4.5★ (856 reviews on Gartner)
  • Main competitors: Dynatrace (4.6★), New Relic, Splunk
  • Green flag: Named Gartner Leader for 5 consecutive years

• Pricing Power vs Competitors

  • Competitive context: Splunk offers $15/host/month vs DDOG premium
  • User feedback: DDOG described as “prohibitively expensive”
  • Mitigating factor: 81% gross margin suggests pricing power intact

• Product Differentiation & Moat

  • DDOG advantages: 84% of customers use 2+ products, 54% use 4+
  • Switching costs: High (data migration, team retraining)

4. VALUATION (10 items - 2 hours)

• Price-to-Sales (P/S) Ratio Comparison

  • DDOG current: 17.2x price-to-sales
  • Peer average: 10.7x (software companies)
  • Assessment: DDOG trading at 61% PREMIUM to peers
  • Question: Is 17x P/S justified by DDOG’s quality?

• Forward P/E Ratio Analysis

  • DDOG current: 70-74x forward P/E
  • High-growth SaaS: 60-100x forward P/E
  • Assessment: Trading at growth SaaS premium

SUMMARY SCORECARD

Financial Health: ___/12 items

• Revenue growth: Strong / Adequate / Weak
• Profitability: Strong / Adequate / Weak

Customer Retention & Churn: ___/8 items

• NRR trend: Improving / Stable / Declining
• YOUR PRIMARY CONCERN - Status: Acceptable / Concerning / Deal-breaker

Competitive Position: ___/10 items

• Threat level from competition: Low / Medium / High

Valuation: ___/10 items

• Relative valuation: Cheap / Fair / Expensive

DECISION FRAMEWORK

BUY (Full 10% Position) IF:

✅ NRR stable or improving above 120%, gross retention >95%
✅ Competition intense but manageable, no major share losses
✅ Trust leadership despite insider selling (explainable via 10b5-1)
✅ Willing to pay 17x P/S for quality SaaS leader
✅ 3-year horizon allows time for thesis to play out

REDUCE TO 5% POSITION IF:

⚠️ NRR declining below 120% next quarter
⚠️ Evidence of market share losses
⚠️ Insider selling volume increases further
⚠️ Mixed conviction on key concerns

PASS IF:

❌ NRR below 115% or gross retention declining
❌ Clear evidence of losing to Dynatrace/New Relic
❌ Cannot rationalize $206M in insider sales
❌ Premium not justified by slowing growth

RESOURCES

SEC Filings: sec.gov/edgar → CIK 0001561550
Financial Data: finance.yahoo.com/quote/DDOG
Insider Trading: OpenInsider.com → Search “DDOG”
Competitive Intel: Gartner Peer Insights Observability