QB Vision: How Observability Helps Companies See The Field 

Representing the freedom and value observability brings to companies.
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The TD Cowen Insight

Observability has become an increasingly important piece of the software stack as complexity and scale of data and applications increase the need for greater monitoring. Growth of data across the cloud, new AI applications, a wave of vendor consolidation, and greater barriers to entry are shaping a compelling dynamic for observability vendors. 

We see adoption of observability tools accelerating. This is a $40b+ market that we forecast to be $80b in 2027. We see a $23b opportunity for legacy displacements alone.  

What is Observability?

Observability is more than just a newer and better-sounding name for what used to be called “monitoring,” which has existed since the 1980s. We define it simply as “how much can you understand about the internal state of a system just by looking at it from the outside?” Observability allows companies to act on that monitoring, either for planned changes or reacting to unexpected changes. 

Two main purposes are to improve reliability and develop new functionality faster (improving velocity). It encompasses Infrastructure Monitoring, Application Performance Monitoring, and Log Management. 

A Key Tool to Monitor and Manage Complex Software

Observability has gained increasing attention over the last several years as software has become much more complex, making it harder to monitor & manage. Modern, microservice based software applications are quickly evolving, which makes it difficult to understand their performance & behavior, causing a whole host of problems. Observability vendors help solve this by giving companies better visibility into their systems, driving faster issue resolution, more reliable performance & better customer experiences.  

Additionally, they also make developers more productive by freeing up time for higher value work. We think this trend will continue to strengthen given the explosive growth of observability data driven by cloud-native architectures, with AI adding a new accelerant. We also see a more benign competitive dynamic than in the past, a large, growing TAM, and increasing consolidation onto full-suite platforms. 

Projected Growth for The IT Operations Market

The IT operations market was $42b in 2022 & is expected to grow to $70b in ‘27 per Gartner (~10% CAGR). We think a mid-teens CAGR is more likely given data growth & pricing. We created our proprietary TAM based on a bottom-up analysis of IT operations as a percentage of cloud budgets (IaaS/PaaS), driving ~$80b in ‘27E (14% CAGR) based on a ~12% cloud penetration rate. Our analysis suggests a ~$23b opportunity for legacy displacements alone. Additionally, we see leverage to cloud growth as the greatest driver.  

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