Celebration in the Nasdaq during the Datadog IPO, September 19, 2019.
Other years have had more tech IPOs than 2019, but there has never been a year that is minted so many large ones.
After Datadog’s first-day pop on Thursday, the provider of analytics and monitoring tools became the fourth largest cloud software company to go public in 2019 and attain a market cap of $10 billion. Videoconferencing company Zoom, chat program Slack, and cybersecurity seller Crowdstrike are the others.
The new crop brings to 16 the whole number of cloud software firms in the 11-digit team. While 14 of these companies have gone public since the start of 2012, this is the first year with over two that reached $10 billion in value.
It is just the latest indication that public market investors are hungry and ready to cover high-growth tech companies so long as the financials make sense, even as they shun cash-burning consumer companies such as Uber, Lyft and WeWork.
Jason Lemkin, an investor in SaaStr, sees the cloud marketplace continuously opening up to more categories, expanding the total pie. According to Gartner, the worldwide market for people cloud providers will climb 17.5% this year to $214.3 billion. That money has been spread across many locations, including productivity programs, developer tools, security and backend infrastructure.
“There are 100 cloud categories that can do $1b in annual revenues,” Lemkin wrote in a message. “All the IPOs are on track to get that. All good ones at least.”
The 2019 course is very attractive to investors since the largest of these reveal very large customer retention rates, meaning they’re very efficient with their sales and advertising dollars. Not only are clients sticking around, but they are increasing the size of the contracts.
Datadog recorded retention in its most recent quarter of 151percent — a customer that spent $100 a year before is now shelling out $151. Crowdstrike reported that a retention rate of 147percent as of January, Slack’s was 143% and compacted was at 140%.
Based on Tomasz Tunguz of Redpoint Ventures, any company that is at 140percent or higher is at the top decile of subscription companies, according to a survey the company conducted 600 respondents.
“Recently, we’ve seen a series of product-driven companies building huge customer bases with tremendous account expansion and terrific sales efficiency,” Tunguz composed in a article on Aug. 26, about Datadog’s IPO filing. “Datadog is no exception.”
Datadog’s earnings increased 82percent to $83 million in the quarter which ended in June, putting it up with its 2019 peers. Zoom posted 96% increase in its latest quarter, just before Crowdstrike at 94%. Slack was a relative laggard in 58%.
Eric Yuan, CEO of Zoom Video Communications poses for a photograph after he took part in a bell ringing ceremony at the NASDAQ MarketSite in New York, April 18, 2019.
Carlo Allegri | Reuters
With rapid expansion and higher retention comes high multiples — and much more risk. On a price-to-sales foundation, Zoom,
Crowdstrike and Datadog are undoubtedly the most expensive software firms across the whole market, with every valued at 39 times earnings or greater, according to FactSet.
Finally, early investors will need to lock in some profits, creating the possibility of a flood of new shares in the marketplace and a corresponding price fall. Zoom’s post-IPO lock-up interval expires next month, providing many insiders their first chance to market, with the stock up nicely over 100percent from its debut price in April. Crowdstrike’s expiration is set for December.
Slack picked the direct record route, so investors could sell straight away, and they have been doing loads of it since the introduction in June. The stock is below its $26 reference price, and it has dropped one-fifth of its value in the previous 3 weeks, although at least some of that may be attributed to Microsoft’s renewed effort to undertake Slack using its Teams product.
“In our view, MSFT’s competing Teams service significantly reduces WORK’s pricing power and limits the enterprise penetration opportunity,” composed Gregg Moskowitz, an analyst at Mizuho Securities, in a report on Sept. 12. Moskowitz initiated the inventory together with the equivalent of a hold rating and stated, “meaningful multiple expansion will likely require excellent execution.”