Next week, we’ll publish a Palo Alto review, two catch-up reviews on Spotify and Cloudflare, and more coverage.

Core Product Niche:

There’s a lot going on within this product suite and I think that understanding the basics is important. This recurring section will be review for some. If it’s not for you, let’s learn:

This is a dominant player in the data observability space. Observability simply refers to the practice of monitoring an entire asset ecosystem to track issues, vulnerabilities and performance. Knowledge is power, and so this organized surveillance has a way of expediting resolutions to challenges. Other players within this area include the hyper-scalers, Splunk, Elastic, CrowdStrike (through M&A) and many more. Datadog splits its observability niche into 3 smaller buckets: Infrastructure Monitoring, Log Management and Application Performance Monitoring (APM).

Infrastructure monitoring: provides a holistic view of assets like servers and networks. It automates the collection of traffic and overall usage insights. That means it can more expediently fix and uncover infrastructure problems. This can also help clients and their vendors uncover suboptimal compute distribution. Fixing those inefficiencies cuts expenses, expands available capacity, and will only get more popular in a world obsessed with controlling exploding GenAI costs.

Log management: collects and manages logs or “timestamped records of events.” This also facilitates faster issue remediation and optimization of performance. This product routinely supports infrastructure monitoring, BUT there’s a key difference between the two. Log management handles event-based data like customer service interactions, while infrastructure monitoring (as the name indicates) handles infrastructure-based metrics.

Application Performance Monitoring (APM): tracks app performance and uncovers/prioritizes performance issues to be remediated.

There’s also a newer, related form of Datadog monitoring called Digital Experience Monitoring. It’s exactly what it sounds like. This product includes real-time user monitoring (RUM) to track precise, observed interactions, and also Datadog Synthetics, which is similar to RUM, but tracks a simulation of expected interactions – thus enriching the overall picture. Datadog delivers detailed churn analysis, engagement metrics and more from these tools. It also provides mobile app and feature testing, as well as actionable user journey visualization reports.

These four product categories, which frequently work together, form its “unified platform.”

Security:

Because Datadog already handles network viability, security is a wonderfully relevant growth adjacency. Here are some of the important security products:

AI:

Finally, this intro would not be complete without its GenAI product work. Toto is its first foundational large language model (FLLM) and Bits AI is its copilot. So far, this can summarize incidents and conversationally field questions. It’s also rolling out autonomous investigations, removing the manual work from uncovering issues with infrastructure, large language models, apps, usage patterns etc.

Much more is coming. And unsurprisingly, it also tweaked and configured its core products to cater to LLM observability.

Gross margin was pressured by ongoing growth investments, with some offsetting help from engineering and cloud cost efficiency gains. For the same reason, OpEx rose by 30% Y/Y, powering the sharper EBIT margin contraction. It’s worth noting that excluding FX headwinds and their annual DASH product event, EBIT margin would have been 22%. At the same time, the product event happened last year too, so comps are apples-to-apples.

Like it typically does, DDOG leadership baked considerable prudence into forward guidance to set up another quarter of probable outperformance. They remain quite confident in their long-term growth opportunities.

In a note from Bank of America this week, they cited traffic growth for DataDog accelerating a full 7 points compared to June – slightly beyond typical seasonality.

DDOG trades for 65x forward EPS. EPS is expected to grow by 1% this year, 17% the following year and 25% the year after. It also trades for 49x forward FCF. FCF is expected to grow by 8% this year before compounding at a 27% clip over the next two years. They’re in investment mode for 2025.

Core Business & AI Demand Trends:

Overall usage growth was better than expected during Q2, which drove the top-line outperformance. This was driven by AI-native cohort strength. That specific chunk of business has already morphed into a rapidly growing and scaled piece of this company. Specifically, this bucket is now 11% of revenue vs. just 4% Y/Y, and delivered 10 incremental points of Y/Y revenue growth vs. 6 points Q/Q and 2 points Y/Y. That single-handedly allowed revenue growth to accelerate on a Y/Y basis, which is both exciting and a bit nerve-wracking. 

That’s because a lot of this contribution is coming from a single customer (OpenAI). As we’ve covered during the quarter, there’s been a bit of a sell-side analyst battle on the size of this risk. Most believe OpenAI will build some of these tools on its own to vertically integrate and streamline its cost structure. The debate centers on whether or not that will slow the growth engine beyond expectations, or if the rest of the AI cohort (and the core business) deliver strong enough momentum to offset that headwind. We didn’t really learn much about that this quarter, as OpenAI has not begun this expected vendor consolidation process just yet. What we did learn is that AI-native cohort growth ex-OpenAI is very strong and stable Q/Q. They have 80 AI-native customers spending $100,000K+ per year with them – including 8 of the top 10 largest in the space. That bodes well for overcoming the potential obstacle. And at the same time, their forward guidance bakes in pessimism beyond what they’re actually seeing because of risks like this. They saw cloud-native customers embark on the same cost optimization trend 3 years ago, and that caught them a bit by surprise. Now, they’re expecting that in (very strong) forward expectations, thus leaving surprise to the upside. It’s the right decision. 

All in all, DDOG doesn’t think OpenAI will come close to slowing down this growth engine. They view AI as a large business tailwind mainly within the app layer; as we often talk about, that’s the layer (others are models and infrastructure) that takes the longest to monetize. Palantir is really the only software company doing it with dramatic, scaled growth right now.

Outside of AI, core consumption was similar to previous quarters. Small and medium business (SMB) growth accelerated modestly Q/Q, while large enterprise consumption was stable sequentially.

Platform Player Update:

Progress in rounding out DDOG’s value proposition, selling customers more products and becoming a platform play was palpable. DDOG has a seamless ability to add those products to its existing customer contracts and cover a larger part of customer technological infrastructure. Security is a great example of where it can achieve this, and that category crossed $100M in ARR during the quarter, growing at a roughly 45% Y/Y clip. Aside from that, multi-product adoption from customers (not just 8+ product customers in the chart above) is up and to the right… quarter after quarter.

For security specifically, they have more work to do on go-to-market. DDOG thinks they can get better with “standardizing adoption wall-to-wall in large enterprise contracts.” It’s working on packages and incentives to nurture this momentum, which would be great for platform-level momentum.

Product Innovation & Wins:

DDOG unveiled a slew of new products at their user conference this past quarter. These were the highlights: 

In the realm of AI agents,  it introduced autonomous site reliability engineer (SRE) agents. This fully handles alert response, triaging and remediation, while offering fixes to and actionably resolving code bugs. Next, it added security agents that can investigate events, provide the best plan of action for remediation and address vulnerabilities in apps and source code. Finally, it unveiled voice agents that allow security analysts and users to fix any issues right from their mobile devices.

To upgrade DDOG’s software delivery workflows, it added the Internal Developer Portal. This is a cataloged, real-time dashboard of all packages and APIs, and has self-service support for software creation. It also debuted its Model Context Protocol (MCP), which ensures autonomous agents can fetch the required data from a wide array of sources across the web. Early integration partners include Cursor, OpenAI and Anthropic. With Cursor and OpenAI specifically, the new integrations allow DDOG products to be used within the integrated developer environments (IDEs) of each form.

In the spirit of staying ahead in its core niche, it announced some new observability products as well. Its APM Latency Investigator automates forensic investigations to rapidly generate root cause analysis and better optimize product performance. Proactive App Recommendations are also now available. These help analysts and developers stay up to date on tracking APM data to find issues more proactively. Next, it added a new tier to Flex Logs called “Flex Frozen.” This enables customers to store event data for 7 years, with easy querying options that don’t come with data transfer costs. And finally, observability tools for AI models, apps and even GPU performance all should help DDOG become a great partner for helping companies embrace this technological wave in a productive, ROI-maximized manner.

The last product category to discuss is security. Their sensitive data scanners have been retrofitted to handle LLM prompts and responses, while it added support for AI supply chain protection and model hijacking prevention – or maliciously manipulating models to elicit inaccurate responses. Furthermore, it added prompt injection protection and data poisoning help. The first protects against hackers inundating models with poor data to lower output quality; the second insulates companies from adversaries attempting to actually manipulate training data that has already been ingested by models.

If product innovation and solid go-to-market are the causes… big client wins is an effect. This quarter, there were several examples to mention:

More on AI:

Most of DDOG’s AI work continues to be with AI-native customers. It has a real opportunity to grow data, application, and AI-asset monitoring as large enterprises move from experimentation to scaled distribution of AI-powered tools. All of these apps will be rich with context, agents and models that will all need to be monitored, optimized and protected. All of these apps will also need to constantly pull from various parts of the digital world to provide needed context and good experiences. That all means more demand for products that DDOG offers.

That’s when DDOG expects the most dramatic uplift from AI demand. And while that hasn’t happened yet, a 10-point boost to revenue growth from AI is still quite impressive. They also are confident that products like Bits AI will augment existing products and materially contribute to growth.

Another good quarter from this rock-solid company. The product innovation cadence remains rapid and they’re showing clear signs of effectively selling these new products. AI contributions are ramping, while non-OpenAI growth remains quite strong as well. That diminishes a bit (not all) of the risk of OpenAI likely internalizing some of these capabilities in the coming quarters. Opex growth should begin to slow down next year, which is when profit growth should meaningfully accelerate to complement stable top-line expansion. 

Sea Limited is a Southeast Asian giant with three large business branches. Its commerce business is called Shopee and comes with a scaled logistics platform. Its financial services business is called Monee, and features personal loans, some merchant loans and pay later options. Both e-commerce and financial services also have an increasingly scaled presence in Brazil. Finally, its digital entertainment business is called Garena.

SE is most focused on delivering rapid growth for a long time. Still, it is committed to doing so profitability, and thinks it’s in a great spot to deliver profitable expansion for an extended period as well.This commitment led to 85% Y/Y EBITDA growth (thanks to e-commerce), strong gross profit margin (GPM) expansion (despite rapid credit growth) and EPS jumping from $0.10 to $0.69 Y/Y. Great execution.

SE trades for 37x forward EPS. EPS is expected to grow by 177% this year and by 45% next year.

E-Commerce (Shopee):

The e-commerce business grew by 25% over the first half of the year, with Q3 growth continuing at the same rate so far. Based on this strength, they now expect to exceed their 20% Shopee GMV growth guidance for the year. It’s funny. Most teams would be eager to tell shareholders this and put it in bold letters at the top of their press releases. This team didn’t even mention it in the prepared remarks, and only talked about the raise when asked in the Q&A. To me, this just goes to show how focused they are on the multi-year, if not multi-decade, roadmap. They are entirely disinterested in playing the game of beat and raise every quarter… and instead interested in maximum long-term value creation.

The Brazilian competitive landscape was a big Q&A topic due to Mercado Libre recently slashing its free shipping minimums in that important market. SE continues to think they outcompete everyone on delivery cost, speed and marketplace assortment – even after the change. MELI would certainly and sharply disagree with that, but regardless, SE has built a great business in that highly compelling nation.

And per Founder/CEO Forrest Li, they have not noticed a change in their growth trajectory, which makes sense. This is a massive market that is a full ten years behind places like Korea, Western Europe and the USA in terms of e-commerce penetration. Both of these companies can rapidly grow for a long time without impeding each other's success. Their market share is coming from making shopping experiences more convenient, economical and valuable than brick-and-mortar settings. Furthermore, while there is considerable competitive overlap between the two, the primary marketplace niches are somewhat different. MELI’s average selling price (ASP) is 3x higher than Shopee, as it focuses on more expensive assortment with lower order frequency. SE is moving up-market to more expensive things like electronics, while MELI is now moving down-market to everyday essentials and groceries. And again, there’s plenty of runway for both. Beyond MELI competition in Brazil, they’ve noticed zero impact from Temu and TikTok Shop launches very early on thus far.

For more Brazilian-based developments, they’ve maintained positive EBITDA in that market, while delivering 30% Y/Y active buyer growth and 29% gross order growth. They’re now the market leader in terms of gross orders, but again, ASP is ⅓ of MELI’s. This quarter, it added 100 brands to the marketplace, deepening assortment, driving frequency and improving overall results. Like Mercado Libre, improvements in inventory and service directly lead to more growth, which illustrates how much room there is to grow for companies driving better commerce experiences.

All in all, core marketplace revenue rose 46.2% Y/Y and e-commerce EBITDA flipped from -$9.2M to $227.7M Y/Y.

Logistics Complement to E-Commerce:

Like for every scaled e-commerce marketplace, a high-quality logistics platform is a growth accelerant for overall GMV and a source of new revenue opportunities with other sellers. It’s how you promise consumers great delivery times on 1st and 3rd-party goods, which always leads to higher conversion rates and more sales. It’s how you place goods closer to the end destination, cutting miles-to-fulfill and cost-to-serve, while enhancing the margin profile and unlocking an ability to pass savings onto customers. It’s also how you give merchants more reason to list with your company vs. the other guys… thus creating more unique selection and differentiated experiences. Simply put, it’s important.

That’s why SE is perpetually driven to improve efficiency, cost structure and service scores. Logistics profitability in both Asia and Brazil improved Y/Y while speed of service accelerated. Demand forecasting algorithms are improving, it’s getting better at knowing where to put what goods, and key performance indicators are ameliorating accordingly. In Brazil, that has meant 15% Y/Y reduction in cost per order, while 40% of its Sao Paulo region orders now arrive within two days vs. less than 10% Y/Y. Considering that it doesn’t run truck fleets and merely operates sorting centers, the cost hit from continued logistics footprint growth should be relatively modest vs. a company like MELI that owns more of the value chain. SE actually thinks more investments will be positive for EBITDA, so the costs are offset by more revenue.

Advertising & Partnerships:

Advertising has proven to be a reliable source of rising take rates, monetization and e-commerce marketplace value extraction. It has a lot more work to do to keep improving its overall offering and nurturing this growth lever’s momentum. AI investments are up-leveling targeting, reporting and campaign onboarding flows and, as a result, ad customers rose 20% Y/Y while spend per customer rose by 40% Y/Y. Not only does this mean high-margin revenue generation, but, like with logistics, this also supports overall Shopee marketplace GMV. Specifically, Shopee conversion rates rose 8% Y/Y thanks to advertising adoption. The team continues to rapidly split test and experiment with product improvements and has significant confidence that rapid advertising growth and loftier take rates will be sustainable themes. 

It’s also using AI to improve content creation, as it looks to turn live streaming and video into other sources of attention, traffic and demand. 20% of total order volume in Southeast Asia during the quarter was from live streaming, while YouTube videos including a Shopee product link rose 60% Q/Q.

Loyalty Program:

Its loyalty program in Indonesia grew by 50% Q/Q, with a direct 30% uplift to average GMV post-signup. Shopper retention boosts are also 20% for members and it now has 2 million total shoppers in the program. Building on great momentum in its home market, SE just introduced credit card and pay later options for subscription renewal. They called this the “biggest problem” holding back even stronger expansion, and that problem has been resolved. Late in June, SE launched the program in Thailand and Vietnam, with strong early interest.

A big piece of the program’s value is its instant delivery tool for urban customers. This gets goods to people in “as little as 4 hours” in Indonesia, and is now expanding to Thailand and Vietnam to amplify the loyalty program launches in those nations. As an important aside, instant delivery is actually margin accretive. While it’s more expensive for SE, it’s also a lot more expensive for their customers, as this tool caters to their high-end segment.

Fintech (Monee):

Its loan products, on-platform buy now pay later (BNPL) and off-platform BNPL make up the lion’s share of this segment. Starting with personal loans, their balance doubled Y/Y, as they grow more confident in underwriting quality and take advantage of the extensive Shopee customer data profiles at their disposal. Cross-selling these products to existing e-commerce users continues to be the focus here, as it gives them a large addressable market and an ability to grow the credit book with lower risk. It’s valuable to understand your borrowers. For on-platform BNPL, tier-based pricing is helping them customize interest rates based on borrower quality. Overall, this credit product is now 15% of total Shopee GMV. Off-platform BNPL got a large boost this quarter by integrating with Malaysia’s national QR network. This greatly enhanced shopper convenience and flexibility, powering 40% Q/Q growth for the product. The company just launched a similar QR code offering in Thailand. Finally, its small business credit offering rose 94% Y/Y.

All in all, new borrowers rose by 4 million this quarter and these cohorts and consumer + business lending customers crossed 30 million total (+45% Y/Y). Importantly, these new borrowers are “scaling with positive unit economics; credit quality remained strong despite rapid growth. 90+ day non-performing loan (NPL) rate was 1.0% vs. 1.1% Q/Q and 1.3% Y/Y. Great performance here.

Entertainment (Garena):

Its largest game, Free Fire, is sustaining momentum 8 years after launch. It continues to outpace 100M daily active users, and just added a new map to re-excite the user base. This launch was its best ever. This strength is why SE raised Garena bookings growth guidance from double-digits to 30% for 2025. Other new games are performing well, but this is still the star of the show and powered 193% Y/Y average bookings per user growth, along with great operating leverage.

They’re excited by the prospects of using AI to automate gaming content generation and also enthusiastic about easier content sharing leading to better virality and social media-based growth.

Fantastic quarter. This company has proven that they can deliver rapid growth, without sacrificing margins and while maintaining great credit quality. All three of their segments have long runways remaining, while effective expansion into a tough Brazil market shows us how relevant this business can be across the globe.

There is nothing negative to pick at here. Alongside Airbnb and ServiceNow, this is the non-holding I am most interested in owning. Those three round out the current watch list. I don’t love buying into parabolic moves, but I’d be rather quick to begin accumulating shares into any kind of modest pullback. I’m convinced that this team and company are best-in-class in Southeast Asia.

CEO Anthony Noto took to social media this week to lay out some product plans for SoFi Invest. This was in response to the company quickly fixing a user interface (UI) bug that a customer complained about on X. Just like any other great leader, he took the criticism in stride and fixed the problem. 

Beyond that, he laid out a product roadmap for this brokerage product:

He also reminded us that SoFi’s member base isn’t made up of active traders, so it’s important for the company to introduce all of these features in a way that’s simple and intuitive. I’m confident that will happen. The products announced above are not unique and are offered by pretty much all of its competitors. And while that’s clearly the case, all of these items are highly important. They close the product gap SoFi Invest has with most alternatives and finally make this a viable one-stop option for a wider range of people. 

SoFi has subtly differentiated products like a world-class robo-advisor business, great pre-IPO access and a few other bells and whistles, but not offering level-one options or tax lots are deal breakers for many existing SoFi members and prospective customers. Those deal-breakers are now gone. I think SoFi Invest has been the weak link of this otherwise strong and improving financial services arm; that weak link will soon get some much needed help.

There are entirely unconfirmed rumors that Nu is planning to buy Brubank to jumpstart operations in Argentina. I’d just like to point out that both companies have purple logos and their names rhyme, so I’m sold (kidding). In all seriousness, this does seem like a great decision for a few reasons:

Reason 1: Nu has clearly proven that its business model is highly relevant across three starkly different Latin American economies. There’s so much reason to believe that the structural cost advantages we always talk about can work in other nations like Argentina and across the globe. 

Reason 2: Argentinian macro has gone from nightmare to considerable strength, which makes timing for this rumored purchase quite good.

Reason 3: Accelerating Nu’s path to digital bank licensure in Argentina, as this process without M&A can take more than a year.

Reason 4: Established teams and business in Argentina without a traditional branch system (maintain cost advantage). Several sources all say different things, but it looks like Brubank does somewhere between $15M-$50M in annual revenue and has somewhere around 6 million customers. I’d be optimistic about Nu’s ability to turbocharge that financial engine. 

Amazon is upping its 1st-party grocery game in 1,000 U.S. cities by offering its grocery selection directly on Amazon.com (not just Amazon Fresh or Whole Foods). Customers in those places can now order fresh, perishable groceries alongside all other marketplace categories and combine those baskets for same-day delivery. This will expand to 2,300 cities by the end of the year, and will allow typical marketplace customers to now access fresh foods in one order within hours. Food is stored in insulated bags and subject to a “six-point quality check,” to build consumer confidence. Orders of $25+ come with free shipping for Prime Members (it’s $35+ for Walmart+ and $40 for Uber One), deepening that already world-class loyalty program. It creates some slight incremental convenience vs. Kroger, Target, Uber (yes, this is more competition for them), and a few other loyalty programs that don’t allow for grocery orders to be combined with Amazon’s world-class marketplace assortment. 

It also now matches a service Walmart offered that Amazon previously didn’t. While Amazon already had Amazon Fresh, the newness here is in that combination of perishable groceries and other goods. That should mean more convenience for shoppers and more orders combined into fewer packages for Amazon, which should offset the small margin headwind from lower fees vs. its other grocery business. Amazon will continue to operate Amazon Fresh, Whole Foods’s delivery business and offer 3rd-party grocers as well.

Robinhood published metrics for July this past week. They added 160,000 funded customers M/M to reach 26.7 million. Platform assets rose 7% M/M or 106% Y/Y, while deposits rose at an annualized pace of 28%. Equity volumes were up 100% Y/Y; options volumes were up 22% Y/Y; and crypto volumes were up 217% Y/Y (helped by Bitstamp M&A). Cantor came out with a note praising the results that were uniformly above their own expectations. This prompted them to boost 2025 and 2026 revenue estimates by 6.1% and 8.3%, respectively. EBITDA targets were boosted by 10.8% and 13.2%, respectively. Consensus estimates also ticked modestly higher for both revenue and EBITDA, implying most analysts were pleasantly surprised.

The Producer Price Index (PPI) and Core PPI for July both came in at 0.9% M/M vs. 0.2% expected and 0% last month. This was driven by final demand trade services, as well as inflation across food and many other goods. This is producers finally absorbing the impact of global tariffs in their cost structures. Over the coming months, these prices will either be passed onto consumers or eaten by producers. I think it’ll be a combination of both. While this was an ugly print, I think it will be temporary, not structural. Input prices will not continue to rise in perpetuity and could even fall if new trade deals lead to lower tariff levels. That’s why rate cut probability for September is still sitting at 85%, with a 51% chance of another cut in October. I do not believe this is remotely similar to the sticky inflation we saw following historically aggressive stimulus and loan pauses. I think this batch of inflation will actually be “transitory” and will calm down following the next CPI reading (when we could see the impact of inflation getting passed onto consumers).

Inflation Data:

Consumer & Employment Data:

Output Data: