At their recent user conference, MongoDB positioned themselves as the first “Application Data Platform”. Their vision is to address all data storage workloads that developers typically need to build a modern, scalable software application. The scope of this goes far beyond their previous niche as a document-oriented database, to span caches, search indices, mobile app interfaces and even basic analytics for data visualizations. The premise is that developers prefer to focus on building features, versus worrying about data storage infrastructure. As cloud data solutions proliferate and IT roles converge, MongoDB wants to reduce overhead for developers through a unified data storage platform. Their goal is to increase developer productivity by eliminating the “tax on innovation”.
Internet usage patterns and delivery of software applications are undergoing major paradigm shifts. Decentralization is the primary pattern – transitioning away from fixed network entry points, concentrated clusters of compute and single data stores. These changes are being driven by the rapid evolution of work habits, software architectures, connected devices and data generation. After years of Internet resource convergence, we are witnessing a shift towards the broader distribution of compute, data and network connectivity.
Software applications are pushing processing workloads and state outwards towards the end user. This transition began to lower response times for impatient humans, but will become a necessity to coordinate fleets of connected devices. With work from anywhere, network onramps cannot all be routed through central VPN entry points protected by firewalls. Distributed networks backed by dynamic routing will increasingly facilitate point-to-point connections between enterprise users, their productivity apps, corporate data centers and local offices. Massive troughs of raw IoT data have to be summarized near the point of creation before being shipped to permanent stores.
These changes are being driven by exogenous factors, reflecting the same bias towards decentralization. Workers are less likely to concentrate in large office campuses where their network connectivity can be protected by closets of security hardware. The proliferation of connected devices and high-bandwidth local wireless networks are creating new opportunities to streamline industrial processes and enable machine-to-machine coordination. Privacy concerns are prompting government regulations to keep user data within geographic boundaries. The convenience and efficiency of digital engagement are forcing enterprises to move consumer touchpoints onto virtual channels.
Overlaying these trends is an increasing need for security. While hackers have existed for years, the decentralization of defenses and migration away from physical engagement are creating new opportunities to exploit vulnerabilities as technology tries to catch up with consumer habits. Information sharing, corporate-like organization and untraceable payment systems are propelling the practice of hacking into a thriving business function. This has thrust digital security from the back of the enterprise to the front office, layering over every corporate activity. Digital transformation extends the same risks to the enterprise’s customers.
These forces are creating significant opportunities for nimble software, network and security providers. Entrenched technology companies are responding, but existing business incentives and fixed system architectures are creating inertia. Foundations in centralized compute infrastructure, big data stores and network hardware sales are difficult to evolve. Newer companies grounded in a distributed mindset are better positioned architecturally, commercially and culturally to address the new landscape. Focused independent players will carve out large portions of the growing market for distributed Internet services.
In this post, I explore these trends in network connectivity, application delivery and data distribution, and then link them back to the independent, forward-thinking public companies that are capitalizing on them. While many companies are lining up against these trends, I will try to limit my focus on the implications for a few high growth software and network infrastructure companies tracked on this blog. Specifically, these include Cloudflare, Zscaler and Fastly. I will also use this narrative to weave in updates on each company’s recent quarterly results, product developments and strategic moves.
Twilio released Q1 2021 earnings results on May 5th. They continue to demonstrate strong revenue growth at scale, with both Q1 actuals and Q2 estimates coming in well ahead of expectations. The continued delayed progress on gross margin improvement is causing some consternation for investors. Twilio has plans for this, but they are taking time to ramp. Additionally, rapid headcount growth is putting pressure on operating margins for the next quarter, but I expect this to be transitory as Twilio absorbs and optimizes staff from recent acquisitions.
Overall, Twilio is continuing their consistent expansion trajectory. The key to appreciating Twilio’s potential is to consider the enormous TAM that they occupy, their leadership position within it and the multiple product expansion vectors still available. Platform growth is coming both from organic product development and strategic acquisitions. Segment in particular adds a whole new dimension of insight to Twilio’s communications capabilities, allowing the combined company to close the loop on customer preferences and optimize marketing performance in a way that CPaaS competitors cannot match. Twilio is quickly evolving beyond just providing communications plumbing to enabling data-informed applications that drive enriched customer engagement for enterprises.
Datadog reported Q1 2021 results on May 6th. Overall performance was strong and the market rewarded the stock with a 8.3% boost the next day. Datadog is demonstrating a return to high revenue growth coming out of the one-time, COVID-impacted engagement dip in Q2 2020. This provides a favorable set up for the remainder of 2021, as the customer expansion flywheel keeps spinning and revenue growth re-accelerates. The stock has largely consolidated for almost a year, with the current price below the peak reached in June 2020. As with all growth stocks so far in 2021, valuation multiple compression is limiting price appreciation. Even taking this into account, my end of year price target is higher than current levels and I have increased my portfolio allocation to DDOG.
Recently, I had the pleasure of speaking at the FinTwit Summit 2021. If you didn’t attend, it consisted of 16 speakers presenting on a variety of investing topics over the course of March 20-21, 2021. My talk was entitled “Ask your Developer… For your Next Investment Idea”. It focused on the premise that developers are key to enabling the digital transformation we all hear about and increasingly have influence over software purchase decisions. By observing how developers evaluate the software providers that cater to them, investors can gain signals to pick the probable winners in the software tooling and infrastructure space. Many of these providers are publicly traded companies.
As I had dedicated the last couple of weeks preparing for that talk, I wanted to share my take-aways in a blog post. For those who didn’t have a chance to attend the Summit, you can still register and get access to all the recorded sessions. This post will explore the points I made in more detail and share how I am positioning my portfolio for the year. This is grounded in the trends I continue to see for the companies providing the building blocks for developers to deliver the next wave of digital experiences.
Datadog announced Q4 and full year 2020 results on February 11th. They handily surpassed expectations for Q4 revenue and earnings. Similarly, they set initial guidance for Q1 and FY 2021 revenue above analyst estimates. In spite of this, the stock dropped about 4% the next day. This is likely attributable to continued concern for deceleration of the annual revenue growth rate and initial FY 2021 revenue guidance.
In spite of this, I think the results were strong. If we dig a little more deeply into quarterly trends, sequential revenue growth has been increasing since the COVID-driven Q2 dip and reached almost 15% for Q4. This trajectory implies that annualized revenue growth could inflect to the 60% range or higher as 2021 progresses. Customer metrics, both in new additions and spend expansion, further support the recovery case. Additionally, Datadog’s product development funnel continued to produce new revenue streams, bolstered by organic product extensions and a couple of acquisitions. Datadog now has 10 monetized product offerings and customers continue to adopt the newer ones.
Following these results, I have accumulated a mid-sized position in DDOG in my personal account. I have been covering the company for almost a year, waiting for a favorable entry point as Covid paused revenue growth. While Datadog had been executing well, I wanted to see revenue growth normalize before starting a position. I believe that has happened. Looking forward, I think 2021 will see Datadog return to its normal cadence of predictably high revenue growth combined with improving operational leverage. Additionally, rapid product expansion is presenting new market segments to drive growth. In this post, I review the Q4 results, product development progress and what we can look for in 2021.
One of the more tedious aspects of e-commerce in the U.S. and globally can be dealing with tax collection and remittance. This is complicated by a web of regional regulations that must be addressed based on the location of each customer. Traditionally, sellers could ignore these requirements, as their business activities were largely confined to a local geography. However, the rise of online sales and new legislation have encouraged government organizations to become increasingly aggressive in ensuring they extract their due share of taxes. Further, as businesses of all sorts move online, other types of regulation and compliance enforcement is emerging. Left on their own, online sellers and service providers could expend significant resources keeping up with these requirements.
Fortunately, new technology providers have emerged that help companies navigate this situation. These services are often delivered through open APIs and integrated with popular e-commerce platforms. They handle the calculation of tax, filing and remittance to every required jurisdictional entity. In addition to sales tax handling, these services are branching out into other aspects of regulation compliance, including managing exemption certificates, business licenses and the bevy of new use taxes globally. One of the leading independent providers of these services is publicly-traded Avalara (AVLR).
As companies increasingly migrate offline business processes to new digital channels, consideration for tax payments and compliance must come along. This has created a large and growing opportunity for solution providers that make compliance management easy. With an increase in government activity to regulate tax collection, privacy, online behaviors and safety, we can expect compliance enforcement to increase. This blog post examines the history of taxation of e-commerce, along with future implications for additional oversight of emerging digital channels. Further, it reviews the leading providers of compliance automation services with a focused analysis of Avalara (AVLR), which is becoming the dominant player in the space. The goal is to provide investors with an avenue to capitalize on the growing demand for services that simplify regulatory overhead for online businesses.
Much has been written about how enterprises are awash in data, generating new signals at an accelerating rate. A lot of this focus has been on the data analytics and machine learning space, where arguably a large opportunity lies. Businesses are struggling to process all their data in order to gain new customer insights and improve performance. Recent IPOs like Snowflake, C3.ai and Palantir have driven investor interest and delivered valuations that reflect the huge potential.
While these opportunities in big data convergence, AI and advanced analytics are exciting, an equally significant evolution is happening on the transactional side of data storage and distribution. Models for data storage have moved far beyond a single large relational database housed on premise. Application architectures are evolving rapidly, with the return of rich clients, disparate device channels, an ecosystem of APIs and breaking up monoliths into micro-services. Cloud hosting and serverless have provided new ways to manage the runtimes that execute code. Software engineering roles have been coalescing, highlighted by the ascendancy of the developer and a bias towards productivity.
These forces are creating opportunities for emerging technology providers to capture developer mindshare and power application workloads. Cloud-based services have lowered the barrier to entry for launching new transactional data storage solutions. In the same way that Snowflake created a robust offering separate from the hyperscalers, independent data storage companies are thriving on the transactional side. This blog post provides investors with some background on application data storage technologies and an examination of trends in modern software architectures. It concludes with a survey of companies (several that are publicly traded) which stand to benefit as application workloads explode.
DocuSign announced Q3 FY2021 earnings on December 3rd. The results were strong, with large beats on both revenue and EPS. Additionally, they raised Q4 and full year estimates by a wide margin. Annualized revenue growth continued to accelerate past the 50% mark in Q3 and appears likely to repeat the same for Q4. DOCU stock popped over 5% following earnings, after increasing 6% in anticipation the day before.
On the earnings call, the leadership team spoke to the significant opportunity for DocuSign beyond eSignature, highlighting continued growth in international, renewed customer interest in the full suite of CLM services, new AI-driven offerings and the introduction of Notary. These factors should maintain momentum in 2021, as tailwinds mitigate from social distancing mandates. In this post, I review DocuSign’s Q3 earnings results, customer activity and other business updates. I also dig into product enhancements, fueled by internal development efforts and the integration of thoughtful acquisitions. Finally, I revisit the competitive landscape and DocuSign’s unique position as the dominant player in a large addressable market. For additional information on the DocuSign investment thesis, interested investors can read my past quarterly updates and original deep-dive.
Elastic announced Q2 FY2021 (Aug – Oct) earnings on December 2nd. The results were well ahead of expectations, with significant beats on both revenue and EPS. They also delivered a meaningful improvement to profitability measures, with non-GAAP gross margins ticking up 2.5% and operating margin almost at break-even. Next quarter and full year guidance were raised about 5-6% as well, but still reflect some conservatism due to the macro environment. The market reaction to the results was positive, with the stock spiking 12.6% on December 3rd and climbing another 6.1% the day after. On the earnings call, the leadership team provided updates on customer wins and their broader go-to-market strategy. Elastic’s rapid product development cadence continued with a major release in November, that included searchable snapshots, RUM, synthetics and Kibana Lens.
Additionally, Elastic held their annual user conference ElasticON in mid-October. The event was packed with over 300 sessions and 25,000 user registrations. Most interesting were the many customer presentations, revealing the depth and breadth of usage of Elastic solutions within large enterprises. This underscored Elastic’s product strategy of usage expansion across multiple solution categories from a single platform with a unified, resource-based pricing model. In this post, I review Elastic’s Q2 earnings and other business updates that occurred during the quarter. I also examine product enhancements and Elastic’s general competitive positioning. For additional background on the Elastic investment thesis, interested readers can review my past quarterly updates and original deep-dive.
