Size of the text
Datadog, Dynatrace, and Elastic are all rated Buy by Citi analyst Tyler Radke. He’s optimistic about software companies that specialize on “observability,” or monitoring the health of networks.
Dreamstime
A group of companies focused on “observability,” software tools that assist information-technology departments keep tabs on the health of their networks, is one fast-growing offshoot of the cloud computing software trend. With overall IT investment expected to increase as a result of the pandemic, observability players should benefit greatly. In a research note released on Thursday, Citi analyst Tyler Radke made the case for observability equities, initiating coverage of them.
Datadog
(ticker: DDOG) with a $138 target price and a Buy rating.
He also reiterates his Buy recommendation.
Dynatrace
(DT) raises his target to $83 from $67, and keeps his Buy rating on the stock.
Elastic
(ESTC) has raised its objective to $193 from $175. On, Radke keeps his Neutral rating.
Splunk
(SPLK), but raises his price goal from $125 to $145. In a research note on the group, Radke writes, “We have a good outlook for observability investment, with evidence it could reaccelerate as IT spending rebounds and as digitalization projects start up.” “We think the observability TAM (total addressable market) is undervalued.” The observability industry, according to Radke, is a direct beneficiary of public cloud usage as well as the digital transformation trend. He also believes that market projections are substantially too low, estimating the opportunity at $55 billion in 2025, more than quadruple the Gartner estimate of $18 billion. According to a poll of 100 IT clients, expenditure on the category is predicted to increase by 9% in the next 12 months, which is nearly double the expected increase in overall IT spending over the same period. While observability is a relatively new keyword, the principle has been around for decades. He notes in the note that “the term observability actually stretches back over six decades to 1960 and has its roots in engineering and mathematic applications.” “Observability was described as a ‘measure of how well a system’s internal states may be deduced from knowledge of its exterior outputs.’ While the term was first coined to describe the intricate interworkings of analog mechanical systems, it has come to denote “the approaches that companies employ to understand the functioning of an increasingly complicated tech architecture.” Infrastructure monitoring, application performance management, log management, and telemetry, according to Radke, are the three key pillars of the market. “Having access into these three components should theoretically allow enterprises to identify service issues, isolate whether it is an infrastructure or application issue, and remediate,” he adds.
Subscribe to our newsletter Review & Sneak Peek Every weekday evening, we summarize the day’s most important market news and explain what’s likely to matter the next day.
Here’s a quick rundown of his thoughts on the four equities he discussed in the report: He predicts that Datadog will “reaccelerate growth in the short term,” based on recent customer enthusiasm and recovered IT spending. He says, “We believe the long-term picture as positive, with minimal secular risk and durable growth driven by ongoing robust new client additions and multi-product strength.” The stock’s premium valuation – it trades for 30 times estimated 2022 revenues, according to Radke – is justified by the company’s growth, profitability, and possible upside to consensus expectations, he claims. Radke expects Dynatrace gaining market share in application performance monitoring. He claims that growth has recently accelerated to 30% from 25%, thanks to strong execution and a faster migration to cloud computing. Elastic, he claims, offers a unique perspective on observability as well as the corporate search software market. He expects growth to pick up in the second half. Radke has been concerned about Splunk’s migration to cloud-based versions of its software, which has been hurting on financial results. With the stock market falling on Thursday, all four companies’ stocks are down: Dynatrace is down 2%, Splunk is down 1%, and Datadog and Elastic are both down just under 0.5 percent. Eric J. Savitz can be reached at eric.savitz@barrons.com./n
Read More
