Table of Contents
Data hound (NASDAQ:DDOG) And PagerDuty (NYSE:PD) both help IT teams monitor and manage their software and hardware infrastructure through cloud-based services. Datadog’s platform provides IT professionals with real-time visibility into a company’s infrastructure, applications and logs through unified dashboards. That streamlined approach helps them identify potential problems before they become more serious problems. PagerDuty’s platform helps IT professionals respond quickly to major incidents by organizing their on-call schedules, escalation policies, and alert mechanisms.
Datadog and PagerDuty both went public in 2019. Datadog shares are up 388% since its IPO, but PagerDuty is still trading about 8% below its debut price. Let’s see why the proactive player outperformed the reactive one by such a wide margin.
How fast is Datadog growing?
Datadog’s revenue grew at a compound annual growth rate (CAGR) of 67% from 2019 to 2022, while the number of large customers – generating at least $100,000 in annual recurring revenue (ARR) – more than tripled.
But in 2023, sales only increased by 27%, while the large customer base grew by 15%. The net dollar-based retention rate, which remained above 130% throughout 2022, fell to the mid-110s at the end of 2023. Like many of its industry peersDatadog attributed this slowdown to macroeconomic headwinds that prompted many companies to rein in their economic growth cloud spend. But on the plus side, it became profitable under generally accepted accounting principles (GAAP) in 2023 when it cut its expenses.
Looking ahead, Datadog continues to face stiff competition from similar platforms such as Cisco‘s AppDynamics, Dynatrace, New RelicLogicMonitor, Microsoft‘s Azure Monitor, and IBM‘s Instagram. The core market is also maturing: the global market for observability tools and platforms could only grow at a CAGR of 11.7% between 2023 and 2028, according to Markets and Markets.
From 2023 to 2026, analysts expect Datadog’s revenue to grow at a CAGR of 25%, while GAAP EPS will rise at a CAGR of 85%. Those growth numbers are impressive, but the shares aren’t cheap: 78 times forward-adjusted earnings and 17 times this year’s sales. That’s probably why Datadog is up only about 9% this year, and why insiders have sold slightly more shares than they bought in the last twelve months.
How fast is PagerDuty growing?
From fiscal 2020 to fiscal 2023 (which ended in January 2023), PagerDuty’s revenues grew at a CAGR of 30%, while the total number of paying customers grew by 20%. It’s still not profitable on a GAAP basis, but non-GAAP revenue turned positive in 2023.
But in fiscal 2024, PagerDuty’s revenue grew only 16%, while its total number of paying customers fell 1%. The dollar-based retention rate fell to 107% in the fourth quarter – compared to 120% a year earlier. Like Datadog, it appears to be struggling with the tough macroeconomic headwinds facing the cloud software market. But it also operates in a crowded market full of larger competitors, such as Cisco’s Splunk and the leader in digital workflow services Service now.
From fiscal 2024 to fiscal 2027, analysts expect PagerDuty’s revenue to grow at a CAGR of just 12%, while adjusted earnings will grow at a CAGR of 20%. To put that in perspective, ServiceNow generated more than twenty times the revenue of PagerDuty last year, but revenue is expected to grow at a CAGR of 21% from 2023 to 2026. ServiceNow is also solidly profitable on a GAAP basis.
Based on these moderate estimates, PagerDuty stock isn’t cheap: 33 times forward earnings and 5 times this year’s revenue. That’s likely why the stock is still trading at a discount to its IPO price. However, insiders have still been net buyers over the past year, with Ark Invest’s Cathie Wood picking up more shares in recent months.
The better buy: Datadog
Datadog stock could be treading water at these levels until revenue growth and retention rates stabilize, but it appears to have a much brighter future than PagerDuty. PagerDuty needs to meaningfully broaden its position and get back to growing faster than its larger competitors before I consider it a worthwhile turnaround in this choppy market.
Should you invest $1,000 in Datadog now?
Consider the following before purchasing shares in Datadog:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Datadog wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $771,034!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
*Stock Advisor returns July 2, 2024
Leo sun has no position in any of the stocks mentioned. The Motley Fool holds positions in and recommends Cisco Systems, Datadog, Dynatrace, Microsoft, PagerDuty, and ServiceNow. The Motley Fool recommends International Business Machines and recommends the following options: long calls for $395 in January 2026 at Microsoft and short calls in January 2026 for $405 at Microsoft. The Motley Fool has one disclosure policy.
Better Cloud Stocks: Datadog vs. PagerDuty was originally published by The Motley Fool