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Life In The Old $DDOG Yet (Cestrian Stocks Bulletin #89)

Cestrian Stocks Bulletin
Life In The Old $DDOG Yet (Cestrian Stocks Bulletin #89)
By Cestrian Capital Research, Inc • Issue #89 • View online
Good ddog. VERY good ddog. Off you go, boy!

DISCLAIMER: This note is intended for US recipients only and in particular is not directed at, nor intended to be relied upon by any UK recipients. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Cestrian Capital Research, Inc., its employees, agents, or affiliates, including the author of this note, or related persons, may have a position in any stocks, security, or financial instrument referenced in this note. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note’s date of publication and are subject to change without notice. Companies referenced in this note or their employees or affiliates may be customers of Cestrian Capital Research, Inc. Cestrian Capital Research, Inc. values both its independence and transparency and does not believe that this presents a material potential conflict of interest or impacts the content of its research or publications.
A Social Contract Of Sorts
Here’s the deal. You let us blather on about a pay service of ours and why we think it’s cheap and you should join it etc. And in return we’ll tell you about one of the recent winners in that service that we think can keep on winning. Deal? OK then. Here goes. Our turn first, because, you know, it’s our newsletter and all.
Not All Stock Services Are The Same
Our Growth Investor Pro service which we host on Seeking Alpha is going from strength to strength. We’re adding new members all the time and covering more and more stocks in the tech and space sectors. And Q3 so far has been pretty much a blowout!
We take a very simple approach in the service. We use our professional investment experience, which spans three decades, to highlight long-term and short-term stock picks in tech and space. You can read all about our method in more detail Saturday when Seeking Alpha publish their latest interview with us - but in the meantime we can summarize it thus:
  • Industry knowledge helps us locate the most likely segments in which to find winners.
  • Fundamental financial analysis helps us spot the best quality companies.
  • Classical technical analysis plus Elliott Wave technical analysis helps us time entries (and exits for any short term picks - most of our stuff is long term but we aren’t averse to a little free money here and there).
We use that method to publish detailed ideas on stocks, which our members can then use in their own work. The notes go right to your inbox and you can read them anytime on any device. It’s a real money service - Cestrian staff personal account money is invested using the same work, and we publish all planned trades in the stocks we cover, before we trade, so members can trade before we do. Some members follow those trades move for move, but most do their own thing using our work. This is how it should be. You as an investor know your own mind and wallet better than anyone else ever can. So if we can put in front of you a selection of what we think are compelling ideas, explain why we think what we think, for you to decide what to do with them? Then you get the edge we’ve developed over decades, but you retain complete control over your money. 
It helps that this is far from our first rodeo. Most stuff we have seen before and we aren’t easily enthused. We roll cynical at best, and for the most part dead inside. We find that to be an essential part of the mix. We don’t get excited on a bright green day, and we don’t get despondent on a deep red day.
Overall our picks going into Q3 earnings have gone great. Not as great as this new member of ours below says (thanks anyway, very flattering!) but still pretty great. 
Here’s a copy/paste from our members-only chatroom this week.
Source: Growth Investor Pro members' chatroom
Source: Growth Investor Pro members' chatroom
About that chatroom. It is super high quality. We have many members from many walks of life bringing different perspectives and knowledge on the industries and stocks we cover. And because of our Three Rules of Chat, there’s no YELLING or CUSSING or personal politics or stock-shaming or any of your usual social media stuff. There’s a place for all that and it can be highly entertaining if you’re sufficiently dead inside, but, our chatroom isn’t the place for it. As a result? You have a bunch of grownups all trying to win together. 
Many of the best stock ideas come from our members - folks generate ticker ideas, we do the work, and oftentimes a winner comes out of nowhere. Cloudflare ($NET) happened this way. We’re up around 3x on that one in 18 months or so; we got excited about it because one of our members, a cybersecurity pro, said that the company was moving to encapsulate a bunch of security services not commonly offered by CDN players - and that meant the company’s ambition was huge. We looked at the fundamentals and deep down in the SEC filings the numbers told you that revenue growth was highly likely to accelerate and that the revenue was a lot more dependable and less contingent on new name sales than appeared from the outside. And that said to us that the stock’s valuation multiples could move up. We went to a confident Buy and hey presto the stock has been on fire ever since. Thankyou, cybersecurity professional member.
Now, we want to share a recent pick with you here - because, one, we think it has plenty of room still to run, so hopefully the work is of some use to you and, two, it illustrates our method which is non-stock-specific and therefore repeatable. Meaning the method has a good chance of continuing to generate a decent batting average. Meaning that if you join the service we can look you in the eye and say, we think we can keep doing a good job for all our members.
Righto. Without further ado.
This Is What You Came For
DataDog ($DDOG)
Let’s turn to the big ddog in the room. DataDog is a stock we had owned in staff personal accounts, and rated at Buy, during the 2020 post-Covid run up. We did very nicely with it. As growth slowed, we stepped aside. And when growth looked like it was picking up recently, we got back in.
Here’s our members-only note from 5 October, about five weeks ago, before their Q3 earnings report.
Source: Growth Investor Pro
Source: Growth Investor Pro
What that 5 October note said was:
1 - Fundamental Analysis
Remaining performance obligation (that thing buried in the SEC reports) is a chunky % of TTM recognized revenue, and growing fast, so it is likely to drag up the growth rate in recognized revenue (numbers thru Q2 below).
Source: Growth Investor Pro
Source: Growth Investor Pro
That’s exactly the chi we saw building in NET before the stock exploded upwards.
In addition, the company’s cashflow margins vs revenue growth are top-quadrant in our matrix of such things. In other words it is printing money at the same time as growing like topsy. (Note, it still has negative EPS so most analysts miss the huge cash generation because they cannot be bothered to read the cashflow statement becuase, you know, it’s boring). 
So - high growth revenue, likely to accelerate that rate of growth, and generating bundles of cash even at that rate of growth. Nice.
We noted that the stock was valued in the upper range of the cloud cohort as a function of its growth, but that could be justified on the cashflow margins, so that didn’t invalidate the ‘Buy’ idea.
2 - Classical Technical Analysis
This is what the classical chart looked like on 5 October.
Source: Barchart, Cestrian Analysis
Source: Barchart, Cestrian Analysis
Stock sat at the top of the channel it had occupied since IPO. Which usually means - as you can see - that the stock will take a bath, bouncing down off of that upper line of resistance.But then we looked at the wave chart.
3 - Elliott Wave Technical Analysis
Source: TradingView, Cestrian Analysis
Source: TradingView, Cestrian Analysis
Again that’s the chart at 5 October. There’s a lot of stuff in there but in essence if you follow the Elliott Wave logic at the highest level of abstraction (we find it works best for us in the larger degree - that may be our lack of smaller-degree skill, we don’t know!), it said that the current move up could reach $210 without too much trouble. We can bore you literally all day as to why that is but in essence it’s because that’s a standard length of the third wave up of a 5-waves-up set, and the stock looked to us like it was early in that third wave.
This is what we concluded in that 5 October note. You’ll notice it’s a little more considered than your regular “HOT STOCK OMG BUYBUYBUY”. Because, you know, investing is a little more difficult than that. Mostly.
“The easy answer is, do nothing, wait. It’s only one quarter and the trend channel is usually meaningful. And you could easily convince yourself that actually we’re still in a larger degree Wave 1 with a 0.618 or 0.786 retracement yet to come, if the doomsayers of inflation, tapering and general DC chaos are right.
The hard answer is, be bold, lean bullish, and buy. Buy the RPO and buy the wave pattern.
Our answer is this:
1. We move to a Buy rating on a long term basis but you have to read that in the context of the above. Slam-dunk this is not.
2. We’re buying in staff personal accounts at the open today (trade alert shortly) but we’re buying small. Specifically we don’t want that Wave 1 high to be tested and fallen back through if we’ve written a fat check already. So, no stop-losses for us on this occasion but we’re watching the level closely to see whether to add more allocation or not.
Any questions, points, comments, objections, other kinds of voodoo you think may help this tough call, reach out here or in chat.”
And here’s what’s happened to the stock since then. Up 34%. In five weeks.
Source: Trading View, Cestrian Analysis
Source: Trading View, Cestrian Analysis
Or, put another way:
Source: YCharts.com
Source: YCharts.com
Is It All Over? Did I Miss It?
No. We think not. Indeed we think DDOG can run to at least that $208 target, a further 10% from here - and if you don’t mind a little patience, a few months we think, we believe it can hit $264/share, a nearly 40% improvement from today’s close. That number isn’t plucked from thin air - it’s another standard target for a third wave up. 
Lest you think all this wave and technical voodoo is just that, fear not. We always check back to fundamentals. And in cases like these usually you can backsolve to the same answer by a more conventional route.  When DDOG reported its Q3, we saw that its TTM revenue growth rate was 63% - up materially on the prior quarter, as that below-the-waterline Q2 RPO number had told us it might be.
Source: Company SEC filings, YCharts.com, Cestrian Analysis
Source: Company SEC filings, YCharts.com, Cestrian Analysis
Now our best house judgment is that the market isn’t going to cool off much in the coming months. We expect the S&P500 and the Nasdaq to be higher in six months’ time, not lower. Which means that valuation multiples for stocks like DDOG are unlikely to have fallen. So if the company keeps growing revenue at 63% (oh and by the way, the RPO number says it can keep accelerating), then, in a year, the valuation “should” be 63% higher if the market doesn’t change. So in a few months can the stock reach 40% higher in a flat or up-market when revenue growth at DDOG continues to accelerate? Sure it can. So, you choose. Math or voodoo. Either way - we remain big fans of the big ddog.
Sheesh. That’s A Lot Of Work. I Don’t Want To Do That Much Work Before I Buy Stonks.
Well this is rather the point of the service. We do want to do that much work and, sadly, enjoy doing this kind of work. You know what we do to wind down after a long day doing stocks analysis? We watch YouTube videos of other people doing stocks analysis. No, really. Because, you know, we don’t get out much. So the benefit for our members is that they can either walk alongside us blow by blow step by step, working with us in the nth level of detail, or they can just read the bullet points in their inbox at the weekend. We have members that do both, and members that operate somewhere in between. But as you can see from our reviews, we have a whole bunch of happy members.
Join us. The service is exceptionally good value. Rack rate is $159/month or $1599/year. The annual is cheaper, but you’re not locked in even with the annual. If you sign up and hate it, on the monthly you quit and pay just that month. On the annual, quit, and Seeking Alpha’s “Limited Money Back Guarantee” refunds you 11 months’ worth. So your downside here is limited, and your upside? Well, ask our members.
Oh also. If you follow us on Seeking Alpha? Let us know and we’ll send you a coupon for a further 50% (yes - fifty percent) off your first year if you take the annual. Just email us at [email protected] with your Seeking Alpha username or number. NOT your password and CERTAINLY not your payment details. If you don’t want to email us, just message us within the Seeking Alpha messaging platform. Or send a carrier pigeon with a note. All we need is your username or number to get you that coupon. 
50% off your first year. 
Cestrian Capital Research, Inc - 12 Nov 2021.
Disclosure: Cestrian Capital Research, Inc staff personal accounts hold long positions in, inter alia, DDOG, NET, TQQQ.
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