The long-term count has Bitcoin in a final 5th wave push, which will complete the bull market that started at the late 2022 low. To be more exact, I believe that we are in wave 4 of this final 5th wave. The 4th wave is targeting the $87,000 – $78,000 region. This drop can go as low as $75,000 and still support the above count. If we hold $75,000, I expect one final swing into the $114,000 – $150,000 region. If this happens, this is where we plan to reduce the remainder of our Bitcoin position. If we instead break below the $75,000 region in the continuation of this volatility, we will look to reduce our exposure on the bounces.
Nvidia
Nvidia is in a long-term secular bull market. However, like all secular bull markets, there are periods of volatility that can see a stock drop 30% – 60%. Apple, for example, launched the iPhone in June of 2007, and then dropped +60% In 2008 – 2009. It also saw several 40% and 30% drawdowns while remaining the primary beneficiary of the mobile phone tech trend. These were buying opportunities. Nvidia will not go higher in a straight line, and for those that are patient, we believe a better price for a long-term buy-and-hold strategy will likely manifest.
Until then, the current pattern we are in appears to be an ending diagonal for wave 5 off the 2022 low. If accurate, we should get another drop into the $126 – $116 region, which would then lead to a move into the $170 – $205 region. Our plan is to add on the coming drop, and trim if we get the expected 5th wave swing that will complete this ending diagonal pattern.
Taiwan Semiconductor
TSM also appears to be in an ending diagonal. The final 5th wave is targeting the $235 – $250 region. What we must be on the lookout for is an extended diagonal pattern. So, instead of being in wave 5, we might be in the early stages of wave 3. This would line up better with what we are seeing in the AI sector this year. This will depend on how explosive the next swing higher is.
We are also closely analyzing the supply chain to identify overlooked beneficiaries of the AI infrastructure buildout, sharing this information as well as potential buy and sell plans and real time trade alerts with advanced signals members. Learn more here.here.
Please note: The I/O Fund conducts research and draws conclusions for the Fund’s positions. We then share that information with our readers. This is not a guarantee of a stock’s performance. Please consult your personal financial advisor before buying any stock in the companies mentioned in this analysis.
CrowdStrike will report its Q1 earnings today. The company was founded with the goal of reinventing security for the cloud era. CrowdStrike’s Falcon platform delivers comprehensive breach protection against today’s most sophisticated attacks on the endpoint and beyond. The company has found a niche due to its AI native platform, which is easy to deploy and allows it to scale more modules for its customers.
CrowdStrike’s AI-based security model is focused on collecting large amounts of data, centrally storing it in a single model, and continuously training its algorithms with vast amounts of threat intelligence data. The more data that the Falcon Platform collects, the more intelligent the platform becomes in detecting and stopping breaches. The company has been GAAP profitable for the last four consecutive quarters. The company has been reporting strong metrics and has set a high bar to clear in the coming quarters. One of the key metrics, the net new ARR, accelerated 14 points in Q4 to 27% YoY growth and the management has guided for “Q1 net new ARR year-over-year growth to be at least double digits up to the low teens.”
Revenue
The management revenue guide for Q1 is $902.2 million to $905.8 million, representing a YoY growth of 30.5% at the midpoint. The analysts expect revenue to grow 30.7% YoY to $904.82 million and a similar growth in Q2. The company reported 32.6% YoY growth to $845.34 million in Q4.
Margins
The company has achieved a remarkable feat of GAAP profitability in the consecutive four quarters and full year GAAP profitability. The management guide for the adjusted operating income is $189.45 million for Q1 or 21% of revenue, which is a 4-point deceleration sequentially. However, on a YoY basis, the guide is a 4-point acceleration.
The FY2025 ending January guide implies a flat adjusted operating margin of 22%. In September 2023, during the Investor briefing at the Fal.Con, the company set a new financial target for the adjusted operating margin of 28% to 32%, which it expects to achieve within FY2027 to FY2029.
The Q4 gross margin was 75%, flat sequentially and up 300 bps YoY. The subscription gross margin was flat sequentially at 78% and up 300 bps YoY.
The Q4 operating margin was 4%, up from 0.4% in the September quarter and (-10%) in the same period last year. The adjusted operating margin was up 300 bps sequentially to 25% and a stellar 1000 bps improvement year over year was helped by operating leverage.
Q4 net margin improved 300 bps sequentially and 1300 bps YoY to 6%. The adjusted net margin improved 300 bps sequentially and 1000 bps YoY to 28%. The management adjusted net margin guide for the next quarter is $221.75 million or 25% of revenue, if reported will be down 300 bps sequentially and up 500 bps YoY.
Q4 adjusted EPS grew by a whopping 102% YoY to $0.95 and beat estimates by 15.3%. The management guide for the next quarter is $0.89 to $0.90. The analysts expect adjusted EPS to grow 56.3% YoY to $0.89.
Management expects operating leverage to improve in the second half of the year. CFO Burt Podbere said during the earnings call. “Third, given our strong momentum in the market, we are increasing our pace of hiring in FY 2025 as we continue to invest in our innovation engine and go to market functions to scale the business to $10 billion of ARR and beyond. As a result of increased hiring in the first half of the year, changes to the timing of our merit cycle and the timing of certain marketing programs, we expect operating leverage to be more weighted to the back half of FY25.”
Cash Flow and Balance Sheet
The company generates strong cash flows. Q4 operating cash flows grew by 27% YoY to $347.02 million or 41% of revenue, an improvement of 600 bps sequentially and down 200 bps YoY.
The free cash flows grew by 35% YoY to $283 million or 33% of revenue, an improvement of 300 bps sequentially and flat YoY. Management has increased the full-year free cash flow guide to 31% to 33% from 30% to 32%. FY 2024, the free cash flow margin was 31%, a 100 bps improvement YoY.
The company had cash and short-term investments of $3.47 billion and debt of $742.5 million, compared to $3.17 billion and $742.1 million, respectively, in the previous quarter.
What More to Watch
Key Metrics
ARR
Q4 ARR of $3.44 billion was up 34% YoY compared to ARR of $3.15 billion and growth of 35% in the previous quarter. Management has stated: “We continue to aggressively invest in our innovation engine and flank the company to achieve its vision of reaching $10 billion in ARR over the next 5 to 7 years.” That would imply about 200% growth in 5-7 years.
Net New ARR
The net new ARR is the most tracked key metric for the company. The net new ARR accelerated to 27% YoY growth to $281.9 million in Q4, a 14-point acceleration from 13% growth in the previous quarter. The management does not always provide the net new ARR guide, however due to the strong Q4 the CFO said in the earnings call, “Second, while we do not specifically guide to ending or net new ARR, given the incredible performance of Q4, I will share our current seasonality assumptions with respect to net new ARR and Q1, which calls for Q1 net new ARR year-over-year growth to be at least double digits up to the low teens.”
The management also sounded confident to net new ARR building from Q1 and beyond.
Matthew Hedberg (Analyst)
Great. Thanks for taking my question. I'll offer my congrats as well, guys. Burt, your new ARR commentary was helpful for Q1. I'm curious, this time last year, I believe you talked about flat net new ARR growth for fiscal 2024. And obviously, I think you guys did about 6% this year. Any just sort of like directional guardrails you give us from a full year perspective in terms of sort of just thinking about from a net new perspective.
Burt Podbere
Hi, Matt. Thanks. So with respect to ARR, obviously, we don't guide to it. But we have talked about in the past where we've started the year in Q1 and build and that's kind of really all I can really comment on ARR. You can kind of infer where we're going with our guide. And — but at the end of the day, our guide, the methodology has remained consistent, and that's how we think about it.
Matthew Hedberg
So it sounds like Q1 — it sounds like your commentary on linearity, you would expect Q1 to low point for net new growth or net new dollars for the year.
Burt Podbere
Yes, That would be accurate.
Billings
The company’s primary focus is on ARR as a more comprehensive measure of its business. We track billings since they are reported for other cybersecurity stocks. Billings were strong in Q4 accelerating to 39% YoY and 65% QoQ growth to $1.36 billion from a (-2%) QoQ decline and 9% YoY growth in the previous quarter.
RPO
RPO accelerated to 35% YoY growth to $4.6 billion from 32% in the previous quarter.
Subscription customers with multiple modules
Subscription customers grew by 26% YoY to 29,000. The number of modules per customer is also increasing, which is very positive. In Q4, they showed a one-point acceleration in subscription customers with five or more, six or more, and seven or more to 64%, 43%, and 27%, respectively. Deals with eight or more modules accelerated to more than double from 78% in the previous quarter.
Dollar-based net retention rate
The Q4 dollar-based net retention rate was 119%, the same as last quarter. The company offered visibility (finally) into the quarterly DBNRR over the past year: “Net retention was 119% in Q3, 119% in Q2 and 122% in Q1.” These numbers had been left vague before. It’s softening a bit and 120% is the benchmark CrowdStrike has stated they want to achieve.
The CFO further provided the guide for the year, “Looking into FY 2025, we expect our dollar-based net retention rate to fluctuate within plus or minus a few points of 120% as the business scales to even greater heights and customers continue to land bigger and with more modules.”
Other key points from the earnings call
The company’s cloud security, identity protection, and next-gen SIEM solutions are driving growth. George Kurtz, CEO and co-founder, said in the earnings call, “Next, delivering the right solutions. Our market-leading cloud security, identity protection, and next-gen SIEM solutions are in demand, because they solve painful customer problems. These businesses collectively are more than doubling year-over-year. Each are IPO able businesses and each play lead roles in Falcon platform consolidation. I'd like to start with our breakout cloud security solution where we are setting new records and winning at scale.
Our cloud security momentum accelerated in the quarter with net new ARR growing nearly 200% year-over-year. At more than $400 million in ending ARR, CrowdStrike is one of the largest cloud security businesses in the market and was recently positioned as a market leader in Forrester's cloud security wave.”
Similarly, Identity protection doubled YoY and surpassed $300 million in ARR in the recent quarter. He continued, “Lastly, let's discuss LogScale next-gen SIEM, an inflecting Falcon platform solution. We added record net new next-gen SIEM ARR in Q4, growing over 170% year-over-year. As of the end of Q4, our next-gen SEIM-ending ARR is now greater than $150 million, selected by well over 1,000 customers.”
The company pointed out several wins from its competitors in its Q4 earnings call. We have highlighted the below two to showcase the company’s competitiveness.
“An eight-figure transaction with a major chip manufacturer added identity to their Falcon deployment. Trapped in a large Microsoft ELA, this organization realized Microsoft needed to bring in a startup to augment its current offering.”An eight-figure transaction with a major chip manufacturer added identity to their Falcon deployment. Trapped in a large Microsoft ELA, this organization realized Microsoft needed to bring in a startup to augment its current offering.”
“A global financial services giant replaced their Palo Alto Prisma Cloud products in a large seven-figure deal. The Palo Alto cloud security products required separate management consoles and separate agents because cloud security is on a separate Palo Alto platform altogether. CrowdStrike was able to deliver an expected 70% time reduction in management as well as more than $5 million in annual staffing cost savings.”The Palo Alto cloud security products required separate management consoles and separate agents because cloud security is on a separate Palo Alto platform altogether. CrowdStrike was able to deliver an expected 70% time reduction in management as well as more than $5 million in annual staffing cost savings.”
Valuation
CrowdStrike is trading at a forward P/S ratio of 18.63 compared to 11.79 for Zscaler, 11.78 for Palo Alto, and 6.62 for SentinelOne. We understand the market expectations are high going into earnings due to its outperformance this year.
Conclusion
The company has done exceptionally well by achieving GAAP profitability. Its modern cloud-based cybersecurity solutions are driving growth. The stock reaction post-earnings for cybersecurity companies have been mixed this quarter. Zscaler stock rose, while Palo Alto and SentinelOne slumped due to the weak guidance.
At the time of writing, YTD CrowdStrike has outperformed its peers.
However, if we take a bit longer time horizon of three years, Palo Alto outperformed by 113%, and thereby, the market had a higher expectation of Palo Alto. It should be watched closely as leaders among their peers. The company might also be included in the S&P 500 as it has been GAAP profitable in the last four quarters and is another near-term catalyst for the stock.
Royston Roche, Equity Analyst at the I/O Fund, contributed to this article.
I was feeling a little bit of Déjà vu on the Datadog call as we got a nearly identical report as Q2. I’m not complaining by any means; a consistent management team that guides conservatively is rare in the environment and exactly what we are looking for.
The price action reversed from +10% in the pre-market to (3%) on the RPO growth of 31% which I discuss below. I’m certain it was when this comment was made and was not due to Q4 growth as that was outlined in the earnings report and had been released for some time with the +10% intact. We had outlined key metrics were “what to watch” so I am not surprised RPO was a hot item in this earnings report.
Notably, the stock price reversed again to about +2.5% when the CFO stated October was strong so far. He is remaining conservative and saying they need to “wait and see” on November and December but analysts (and the market) like it when management provides a glimpse into the current quarter.
Every earnings report right now has something of concern so we make sure to note the areas of concern below. Overall, we are happy with the report yet want to provide a prudent analysis of Q3.
Revenue this quarter came in at $437 million for 61% revenue growth compared to $414.2 million expected for consensus of 53% revenue growth. This represents 7% growth QoQ.
Many investors on our site have owned Datadog for a while now, and will agree that management has a strong track record of sizable top line beats. Despite has slowing revenue growth of 37% next quarter, but my guess by management using the words “conservative” is that we will have another beat in Q4.
The company provided Q4 guidance of $445 million to $449 million which matches consensus of $447 million for 37% growth. FY2023 Guide of $1.65 billion is higher than estimates of $1.63 billion, which reflects the beat in Q3. This represents growth of 60.5% compared to analyst consensus of 58.4% growth.
GAAP EPS of ($0.08) was a bit softer than previous quarters as referenced by the softer GAAP operating margin.
Adjusted EPS was a beat at $0.23 compared to $0.16 expected. This is in line with previous quarters. The adjusted EPS guide is for $0.19 EPS.
Full year adjusted EPS was raised from a guide of $0.74 to $0.81 to $0.92 EPS as the midpoint.
The company reported GAAP Gross Margin of $324 million or 78.2% compared to GAAP GM of 77% a year ago. This is down 180 basis points from previous quarter margin of 80%.
GAAP Operating Margin was (7%) down from (2%) last year and (1%) last quarter. This led to an operating loss of ($31.3) million. GAAP Net Margin was (5.9%) for net losses of ($25.9) million. The difference in the GAAP margin versus Non-GAAP is the high stock based compensation.
Adjusted operating profit of $75 million with Adj OM of 17% beat management guidance for $53 million and growth of 12.8%. The adjusted net margin was 19% for adjusted net income of $81M.
The company is guiding for adjusted operating profit of $58 million for growth for a margin of 12.8% however it does come out to a (20%) decline in YoY growth in adjusted operating profits, at the midpoint. The company stated the softer YoY adjusted gross margin was due to two large events: the DASH user conference and AWS Re:Invent.
FY2022 guide was raised from a margin of 16.4% to a margin of 18.2% for full year adjusted operating profit of $302 million, at the midpoint.
The company’s operating cash flow of $83.6 million is up QoQ and YoY yet represents a lower operating cash flow margin of 15.5% compared to 18% last quarter and 25% in the year ago quarter.
Free cash flow of $67 million is also up QoQ and YoY yet the FCF margin is a bit softer at 15.3% compared to the 21% reported a year ago and is flat sequentially from 15% last quarter. The company has $738M in debt.
Stock based compensation is a blemish at $101 million or 23% of revenue. This is up from 20.2% of revenue last quarter and up from 16% in the year ago quarter.
Key Metrics:
ARR of > $100,000 customers grew 44% to 2,420 compared to 66% growth a year ago. Last quarter, the > $100,000 cohort grew 54%.
Billings accelerated QoQ to 51% YoY for revenue of $467 million, up from $397 million last quarter and 47% growth in Q2. However, YoY Billings are certainly decelearting from 98% growth or $309M.
RPO decelerated and is a concern. The deceleration we noted in our last earnings report and our pre-earnings write-up where we noted the deceleration went from 85% to 51%. This quarter, the deceleration steepened to 31% year-over-year growth for $941 million. RPO is still up on a sequential basis with $858M in RPO in Q1, $881M in RPO in Q2 and $941M in RPO this quarter. If it were to decline on a QoQ basis, the stock would be deeply penalized, so we will monitor this as we go along.
Regarding RPO, the company said the following:
“As a reminder, we signed several large multiyear renewals in Q3 2021, which may make current RPO, a more useful indicator with — as it excludes the multiyear duration impact. We also had a challenging comparables of that metric as Q3 of last year, current RPO growth was about 100%. We continue to believe revenue is a better indication of our business trends than billings or RPO as those can fluctuate relative to revenue based on the timing of invoices and the duration of customer contracts.”
What the market is worried about is that RPO is forecasting a further decel in FY2023 in revenue growth than what Q4 represents.
The company stated “churn remains low” with retention in the mid to high 90s.
Datadog management emphasizes they are a land and expand model. This is best seen in the key metrics in customer-to-product growth: “At the end of Q3, 80% of customers were using two or more products, up from 77% a year ago. 40% of customers were using four or more products, up from 31% a year-ago and 16% of our customers were using six or more products, up from 8% a year ago.”
Additional Notes:
I’m going to quote a few important things from the call on the two items of most concern which is RPO and Q4 guidance.
Here an analyst asked about the CRPO number (current RPO).
“Brent Thill
And just a quick follow-up on the CRPO. I know David, you mentioned, stay focus on that. It is continuing to decelerate, I guess, is that just a function of the large comps? Are you seeing larger enterprise customers? You've seen a slower cadence of large deals come in. Can you give us your take on that?
David Obstler
Yeah, I think we had — the comps are very significant in this quarter. In Q3 of last year, and I think we said this at the time, we had some large multiyear deals. As a reminder, we don't try to target multiyear deal we had from the client side. So that's why the current probably is more over time correlated. It is also moves. So if you look at the average of this, it tends over the longer time to correlate with revenues, but there's a lot of noise in this number. So we steer everyone back to revenues and then the computation we've given everybody how to convert revenues into ARR.”
Here is what was said regarding Q4 guidance remaining unchanged:
Matt Hedberg
Great. Thanks guys. David, for you. Last quarter, you talked about a stronger July versus June. I'm wondering if you could comment a little bit on how the linearity of the quarter played out, and then maybe also how is — how did October trend relative to September?
David Obstler
Yeah. So we — for linearity, it was very similar linearity to what we've had. There was no difference. And so we saw — unlike last quarter a bit, we saw pretty much of a pro rata type of quarter. And we normally have a strong October in terms of the flow of our customers and what they're doing in the platform before pro freezes. We're pleased with what we have seen so far, but still recognize that October is usually strong for us. And it's only the beginning of the quarter.
Oli, anything else you want to add that?
Olivier Pomel
No, I think the one thing you're trying to get through the over time during the quarter, we exited the quarter pretty much at where we entered it. There's no change there. And again, as David said, we're happy with what we see there, and we're also usually happy with our product.
We — Q4 has a bit more seasonality in other quarters, in particular, December tends to be a little bit weaker as a lot of our customers take time off and sit down their development environment and things in that. It's also been a little bit harder to forecast in recent years with the pandemic and the behavior that — the vacation behavior that change after the pandemic. So we are little bit careful with that, and that's all incorporated in our guidance.
Conclusion:
My main concern with Datadog is not the fundamentals or this report but rather the valuation and where it goes from here. We have DDOG at a current P/S of 17.85 with 20 being the ceiling. We could see 30 P/S if the stars align but I would say 20 is where will return to pretty quickly if that happens. I expect cloud to trade range bound between 15-20 for the top 5 or top 10 until macro clears.
This means 40% growth rate can lead to 40% gains if we assume a constant valuation from 2022 to 2023 and any tech investor would take that right now. However, if we see cloud extending, we may be conservative and trim at times.
