Over the last few years, insiders as a group have been huge sellers of technology stocks. The need to diversify their holdings combined with stock prices that had been bid up to levels unhinged from reality contributed to these large divestitures.

After years of selling, we are finally starting to see insider buying in some technology companies.

These purchases are opportunistic and not based on a structured 10b5-1 plan where the insider consistently buys at regular intervals.

The tides have turned in recent months with more insiders of technology companies stepping up to buy shares on the open market. This buying is more opportunistic than the structured buying we saw of companies like Asana (ASAN) by its founder and CEO Dustin Moskovitz through a 10b5-1 plan last year and early this year.

Given the current macro environment this may not be the right time to start buying these companies but I have always liked how insider purchases have been a source of ideas for me.

Datadog (NASDAQ:DDOG) 

Datadog is a cloud software company that initially started out as a infrastructure monitoring solution and over time has added various features to its software solutions ranging from log management to the more recent database monitoring.

These insider purchases were made indirectly through various ICONIQ funds. They purchased shares of Procore Technologies (PCOR) in March 2022 and Braze Inc. (BRZE) a couple of months ago.

(ICONIQ is a San Francisco-based private asset management company with $83.5 billion in assets under management (as of 12/31/2021). The firm provides wealth management services to high net worth clients such as Mark Zuckerberg, Sheryl Sandberg, Jack Dorsey and Jeff Weiner. ICONIQ was founded by Divesh Makan, Michael Anders and Chad Boeding in 2011 and Will Griffith joined the firm in 2012. ICONIQ has been a 10% owner in various companies like Snowflake (SNOW), Fastly (FSLY), Datadog (DDOG) and Procore Technologies (PCOR).)

ICONIQ is not the only fund purchasing shares of Datadog after the big decline in the stock this year that has seen the stock price cut in half. The legendary Stanley Druckenmiller’s Duquesne Family Office increased its stake in Datadog (DDOG) by 165% from 298K to 789K shares as of the end of Q3 2022. 

Market participants were encouraged by these purchases and bid up Datadog stock nearly 10% on Tuesday. The stock now trades at nearly 17 times trailing sales and 62 times cash flow. Despite the pullback in shrinking of their multiples, Datadog continues to trade at a premium valuation because of its high growth rate and the fact that the company actually makes money. 

Datadog grew Q3 2022 revenue by 61% and in a move that is not often seen these days, increased its full year revenue forecast above consensus to a range of $1.650 billion and $1.654 billion. Revenue growth next year is expected to moderate to 35% but that is still well above other software companies that have seen a significant deceleration of their growth rates.

GAAP net income is negative but free cash flow is solidly positive. Over the trailing twelve months, the company posted a net loss of $14 million but free cash flow was a strong $392 million. Datadog has been consistently cash flow positive and that has helped net cash on the balance sheet grow to over $1 billion. As you probably guessed, the big non-cash charge that accounts for this difference between net income and free cash flow was $307 million in stock-based compensation expenses. 

To determine the intrinsic value of Datadog, I built a rough DCF model, assuming a starting EPS of $1.25 in 2023, growing 40% to $1.75 in 2024 and then declining 3% a year through 2032, a 10% discount rate and a 2% terminal growth rate, I get an intrinsic value of $97.52 per share. The stock currently trades at a nearly 22% discount to that intrinsic value.

The $1.25 per share in 2023 is also close to what I get by dividing $392 million of free cash from the trailing twelve months by 316 million diluted shares outstanding. Whether the company manages to grow earnings in 2024 remains to be seen. If interest rates continue to increase, then the 10% discount rate might also be conservative. 

A financial model or a DCF model is only as good as its assumptions and it’s entirely possible that the future may unfold in a different manner.

Insider buying is not a sufficiently strong signal to purchase stocks without further research. It does bring up interesting ideas worth exploring further.

Insiders Sell For Various Reasons But Only Buy For One Reason, They Expect The Stock To Go Up.