One of the challenges of modern business computers is keeping track of what is happening in your network. Breakthrough information technology systems are a messy brew of public clouds, private clouds, old-school data centers, third-party apps, edge computing, and mobile employees. Keeping track of what works – and what doesn’t – is a gigantic challenge. The good news for investors is that the result is a hugely growing market.
Once tediously known as infrastructure management tools, the market for these things now has a sexier, slightly Orwellian name: “observability.” Companies like Datadog (ticker: DDOG),
(DT), Elastic (ESTC) and
(SPLK) provides observation tools to help IT departments monitor the health of their networks. With enterprise technology spending ready to accelerate as they emerge from the pandemic, observable actors should be major recipients.
In a research note last week, Citi software analyst Tyler Radke put a bullish case for the group in general – and especially Datadog, Dynatrace and Elastic. “We see positive prospects for observability costs, with signs that it can be accelerated when IT costs recover and when digitization projects increase,” writes Radke.
While observability is a relatively new buzzword, the concept has been around for decades. “The term observability dates back to six decades to 1960 and has its roots in technical and mathematical applications,” he explains. “Observability was defined as a ‘measure of how well internal states of a system can be inferred from knowledge of its external output.’ ”
In other words, observation tools seek clues to network health, as physicians diagnose diseases by looking for symptoms that point to internal problems. Radke notes that the market has three pillars: infrastructure monitoring (why is the network so slow?); application performance management (what happens to my apps?); and log handling and telemetry (why do we get errors and service tickets?). “Having visibility into these three components allows organizations to identify service issues and isolate them, whether it is an infrastructure or application issue, and address them,” he writes.
In an interview, Radke says that he has been asked by the buying side whether the market is large enough to support the leading players’ eerie growth rates. He is convinced that the possibility of a triple forecast from Gartner is significant, to an estimated $ 55 billion by 2025. He believes that some estimates depend too heavily on revenues from older suppliers of local tools, rather than anticipating the growing use of cloud-based applications.
Radke is particularly keen on Datadog, which provides both infrastructure management and monitoring tools for application performance and ranks it as one of his preferred total software stocks. The stock is not cheap. Datadog shares are traded 28 times estimated with 2022 sales, and the profit is too small for the price-earnings ratio to make sense. But he sees “sustainable growth driven by continued robust new customer additions and multi-product strength” and claims that the premium valuation reflects a combination of premium growth, improved profitability and potential for up to consensus estimates.
He also likes Dynatrace for his position in application monitoring for large companies, and he is keen on Elastic’s combination of observation tools and search software. He is less enthusiastic about Splunk, a company I have written about that has been hampered by an ongoing business model transition that is shrinking financial results. But all four will benefit from it if IT spending follows the script and picks up in the second half.
(AAPL) shares hit record highs last week, pushing the market value to a staggering $ 2.4 trillion. It was the stock’s first new high since January, reflecting growing expectations for financial results in the June quarter, now two weeks away, and the fall launch of the iPhone 13.
In the March quarter, hardware sparked – sales rose 66% for iPhones, 70% for Macs and 79% for iPads – overshadowed 27% growth in services. This segment includes commissions generated from the App Store, where it sells apps for iPhones and other devices; revenue from streaming services such as Apple Music and Apple TV +; and other services such as
There is a growing risk of Apple’s role as gatekeeper and appraiser for app distribution. Last week, a group of state attorneys sued General Google over its control of the Android Play Store. Similar lawsuits against Apple seem inevitable. And as Cowan Washington Research Group analyst Paul Gallant argues, there are likely to be new rules for app stores from the Federal Trade Commission, now led by Lina Khan.
How much risk is there? Services accounted for 16% of revenue in the last six months. Apple recently said the “app store ecosystem” generated $ 643 billion. $ In turnover in 2020, approx. 90% outside the store itself (booking on Uber, for example, or buying items on Amazon). That involves $ 64 billion in in-store activity. If you use the maximum commission of 30%, it is about 20 billion. $ In revenue, just over a third of the $ 57 billion. $ In revenue from calendar 2020. This is in line with app tracker Sensor Tower, which estimates Apple’s 2020 withdrawal from the store at $ 21.7 billion. (For Google, it says it is $ 11.6 billion.)
This means that about 7% of Apple’s revenue is at risk if the App Store is regulated. However, a reduced fee seems to be the most likely scenario, so the true risk is probably less. Apple’s vulnerability is real, but modest. Investors seem carefree.
Write to Eric J. Savitz at email@example.com