Technological values: a new area of growth to watch
One of the challenges of modern business computing is keeping track of what’s going on inside your network. State-of-the-art computing systems are a messy mix of public clouds, private clouds, old-fashioned data centers, third-party applications, advanced computing, and mobile workers. Keeping an eye on what works and what doesn’t is a gigantic challenge. The good news for investors is that the result is a huge emerging market.
Once commonly known as infrastructure management tools, the market for this stuff now has a sexier, slightly Orwellian name: “observability.” Companies like Datadog (ticker: DDOG),
(DT), elastic (ESTC) and
(SPLK) provide observability tools to help IT departments monitor the health of their networks. With corporate technology spending on the verge of accelerating the exit from the pandemic, observability actors should be big beneficiaries.
In a research note last week, Citi software analyst Tyler Radke presented a bullish case for the group in general, and for Datadog, Dynatrace and Elastic in particular. “We see a positive outlook for observability spending, with signs that it could re-accelerate as IT spending picks up and digitization projects resume,” writes Radke.
Although observability is a relatively new buzzword, the concept has been around for decades. “The term observability dates back over six decades to 1960 and has its roots in engineering and mathematical applications,” he explains. “Observability has been defined as a ‘measure of how the internal states of a system can be inferred from knowledge of its external outputs.’ “
In other words, observability tools look for clues about the health of the network just like doctors diagnose diseases by looking for symptoms that indicate internal problems. Radke notes that the market is built on three pillars: monitoring infrastructure (why is the network so slow?); application performance management (what is happening with my applications?); and managing logs and telemetry (why are we getting service errors and tickets?). “Having visibility into these three components allows organizations to identify and isolate service issues, whether it’s an infrastructure or application issue, and resolve them,” he writes. .
In an interview, Radke says he’s received questions from the buyer’s side as to whether the market is big enough to support the skyrocketing growth rates of major players. He’s convinced the opportunity is substantial, estimated at $ 55 billion in 2025, roughly triple Gartner’s forecast. He believes some estimates are based too much on the revenues of existing on-premise tool vendors, rather than anticipating the growing adoption of cloud-based applications.
Radke especially likes Datadog, which provides both infrastructure management and application performance monitoring tools, ranking it as one of his favorite enterprise software stocks. Stock is not cheap. Datadog shares are trading 28 times estimated sales in 2022, and earnings are too low for the price / earnings ratio to be meaningful. But he sees “sustainable growth fueled by continued robust and new customer additions and a multi-product force,” and argues that the premium valuation reflects a combination of premium growth, improved profitability and upside potential. compared to consensus estimates.
He also likes Dynatrace for its position in application monitoring for large enterprises, and he appreciates Elastic’s combination of observability tools and research software. He’s less excited about Splunk, a company I’ve written about that has been hampered by an ongoing business model transition that’s hurting bottom lines. But all four will benefit if IT spending follows the scenario and picks up in the second half of the year.
(AAPL) hit a record high last week, pushing its market cap to $ 2.4 trillion. It was the first new stock high since January, reflecting growing anticipation for the June quarter financial results, now two weeks away, and the fall launch of the iPhone 13.
During the March quarter, hardware shone – sales rose 66% for iPhones, 70% for Macs, and 79% for iPads – eclipsing the 27% growth in services. This segment includes commissions generated by the App Store, where it sells programs for iPhones and other devices; revenues from streaming services such as Apple Music and Apple TV +; and other services like
There is a growing risk for Apple’s role as custodian and toll taker for app distribution. Last week, a group of state attorneys general sued Google for its control over the Android Play Store. A similar litigation against Apple seems inevitable. And as Cowen Washington Research Group analyst Paul Gallant asserts, new rules for app stores from the Federal Trade Commission, now headed by Lina Khan, are likely.
What’s the risk ? Services represented 16% of revenue in the past six months. Apple recently said that the “app store ecosystem” generated $ 643 billion in revenue in 2020, about 90% outside of the store itself (booking rides on Uber, for example, or purchasing merchandise. on Amazon). This involves $ 64 billion in activity through the store. If you use the maximum commission of 30%, that’s about $ 20 billion in revenue, just over a third of the $ 57 billion in 2020 calendar service revenue. This is consistent with the Sensor Tower app tracker, which estimates Apple’s 2020 take in the store at $ 21.7 billion. (For Google, that says it’s $ 11.6 billion.)
This means that around 7% of Apple’s revenue is at risk if the App Store is regulated. But a lower fee seems the most likely scenario, so the real risk is probably smaller. Apple’s vulnerability is real, but modest. Investors seem indifferent.
Write to Eric J. Savitz at email@example.com