Excelent AI Shares Option: Datadog versus Snowflake
Datadog (DDOG) and Snowflake (SNOW) are two tech companies that help businesses optimize their operations using AI-powered tools. Datadog gathers diagnostic data from various software applications, consolidates the info on its multi-functional dashboards, and utilizes its Bits AI generative AI platform to aid IT experts in solving software issues more efficiently.
On the other hand, Snowflake provides a cloud-based data warehouse that collects information from numerous applications, refines the data, and makes it available for third-party analytics applications. Snowflake's Cortex AI platform enables clients to analyze their data using its AI algorithms and even develop their own AI applications.
Both companies witnessed record highs in their stock prices during the 2021 growth surge, but they subsequently lost steam as their growth rates declined and interest rates climbed, leading to reduced valuations. Today, Datadog and Snowflake trade around 36% and 71% below their previous highs, respectively. Is it still wise to invest in these stocks as a long-term AI market play?
Prioritizing profits, Datadog has a stable growth
Datadog's easy-to-use IT diagnostic solutions gained popularity among many companies. From 2019 to 2022, its revenue surged at a compound annual growth rate (CAGR) of 67%, as its base of big-spending clients (generating $100,000+ in annual revenue) multiplied threefold. Its dollar-based net retention rate, a measure of year-over-year growth in recurring revenue, remained above 130% throughout 2022.
However, in 2023, Datadog saw a decrease in growth, with revenue growing by 27% and the number of large clients rising by 15%. Its dollar-based net retention rate dipped to mid-110% by the end of the year. It attributed the slowdown to adverse conditions in the enterprise software market and increasing competition from rivals such as Cisco's AppDynamics, New Relic, Microsoft's Azure Monitor, and IBM's Instana. Despite the decreased growth rate, Datadog focused on reducing expenses and became profitable on a generally accepted accounting principles (GAAP) basis for the full year.
In the first nine months of 2024, the dollar-based net retention rate remained stable at mid-110%, with the number of large clients increasing by 12%. For the full year, it anticipated a 25% revenue increase. From 2023 to 2026, analysts project a CAGR of 24% for its revenue and 96% for its GAAP net income.
Despite its growth slowing down, Datadog could still have room to expand as the observability and AI markets expand. Although its enterprise value stands at $39.4 billion, representing a valuation of 64 times its forward non-GAAP earnings and 12 times next year's sales estimates, its insiders have continued to buy shares, indicating optimism.
Snowflake grapples with a tougher slowdown and ongoing losses
Snowflake's flexible pricing model and compatibility with various cloud platforms made it an attractive option for companies not looking to exclusively rely on a single subscription-based cloud provider. Between fiscal 2020 and fiscal 2023, its revenue soared by a CAGR of 98%, its client base tripled, and its trailing-12-month net revenue retention rate barely changed, dipping slightly from 169% to 158%.
But in fiscal 2024, Snowflake's revenue growth slowed to 36%, and the number of clients and net revenue retention rate dropped as well. Like Datadog, it cited macro challenges for the enterprise software market and stiff competition, such as Databricks and integrated warehousing services offered by leading cloud infrastructure platforms like Microsoft Azure and AWS.
For the full year, Snowflake expects its product revenue (representing the majority of its top line) to grow by 26%. From fiscal 2024 to fiscal 2027, analysts estimate a CAGR of 24% for its revenue, but it will likely remain loss-making on a GAAP basis.
Two recent concerns have emerged: Its CEO, Dan Slootman, resigned, and prominent investor Berkshire Hathaway divested its entire stake in the company. Snowflake's insiders have also been net sellers in the past year.
With an enterprise value of $35.8 billion, Snowflake seems cheaper than Datadog at an 8 times multiple of next year's sales estimates. However, its continued losses indicate its ongoing challenges and limited ability to sustain its growth even as AI applications propel the cloud warehousing market.
The smarter choice: Datadog
Despite its higher price tag, Datadog's consistent growth, increasing profits, and strong leadership from co-founder and CEO Olivier Pomel make it a more appealing option compared to Snowflake at the present.
Given the current market situation and the companies' performance, it might be prudent for investors to consider their financial strategies. Datadog's focus on profitability and consistent growth, despite facing challenges in the enterprise software market, could be an attractive proposition. With a stable dollar-based net retention rate and analysts projecting a strong revenue and profit growth outlook, investing in Datadog could potentially provide long-term returns. On the other hand, Snowflake is still grappling with slower growth and ongoing losses, despite having a more affordable valuation. Therefore, investors might want to consider the balance between growth potential and financial stability when weighing their options for investing in tech stocks like Datadog and Snowflake.
