Datadog (NASDAQ: DDOG) and PagerDuty (NYSE: PD) are both essential tools for IT teams to monitor and manage their software and hardware infrastructure using cloud-based services. Datadog offers a platform that provides real-time visibility into a company’s infrastructure, applications, and logs through unified dashboards. This streamlined approach helps IT professionals identify potential issues before they escalate. On the other hand, PagerDuty’s platform assists IT professionals in responding quickly to major incidents by organizing on-call schedules, escalation policies, and alert mechanisms.
In 2019, both Datadog and PagerDuty went public. While Datadog’s stock has surged by 388% since its IPO, PagerDuty still trades about 8% below its debut price. Let’s delve into why Datadog has outperformed PagerDuty by such a significant margin.
Examining Datadog’s Growth Trajectory
From 2019 to 2022, Datadog’s revenue grew at a compound annual growth rate (CAGR) of 67%, while the number of large customers (generating at least $100,000 in annual recurring revenue) more than tripled.
However, in 2023, the revenue growth slowed to 27% as the large customer base expanded by 15%. The net dollar-based retention rate, which had consistently exceeded 130% in 2022, dropped to the mid-110s by the end of 2023. Datadog attributed this deceleration to macroeconomic headwinds that led many companies to cut back on their cloud spending. Nonetheless, the company achieved profitability on a generally accepted accounting principles (GAAP) basis in 2023 by reducing expenses.
Looking forward, Datadog faces stiff competition from platforms like Cisco’s AppDynamics, Dynatrace, New Relic, LogicMonitor, Microsoft’s Azure Monitor, and IBM’s Instana. Furthermore, its core market is maturing, with the global observability tools and platform market projected to grow at a CAGR of 11.7% from 2023 to 2028, according to Markets and Markets.
Analysts anticipate Datadog’s revenue to grow at a CAGR of 25% from 2023 to 2026, while its GAAP EPS is expected to increase at a CAGR of 85%. Despite these impressive growth rates, the stock is trading at a premium, with a forward adjusted earnings multiple of 78 and a price-to-sales ratio of 17. Consequently, Datadog’s stock has only seen modest gains this year, with insiders selling more shares than they have bought in the past 12 months.
Assessing PagerDuty’s Growth Trajectory
Between fiscal 2020 and fiscal 2023, PagerDuty’s revenue grew at a CAGR of 30%, accompanied by a 20% increase in the total number of paying customers. Although the company remains unprofitable on a GAAP basis, its non-GAAP earnings turned positive in 2023.
However, in fiscal 2024, PagerDuty’s revenue growth slowed to 16%, and the total number of paying customers declined by 1%. The dollar-based retention rate decreased to 107% in the fourth quarter, down from 120% a year earlier. Similar to Datadog, PagerDuty is grappling with challenging macroeconomic conditions affecting the cloud software market. Additionally, it faces strong competition from larger rivals like Cisco’s Splunk and ServiceNow, a leader in digital workflow services.
Analysts project that from fiscal 2024 to fiscal 2027, PagerDuty’s revenue will grow at a CAGR of 12%, while adjusted earnings will increase at a CAGR of 20%. In comparison, ServiceNow, which generated significantly more revenue than PagerDuty last year, is expected to achieve a revenue growth CAGR of 21% from 2023 to 2026 and is already profitable on a GAAP basis.
Given these lackluster growth estimates, PagerDuty’s stock is trading at a premium, with a forward earnings multiple of 33 and a price-to-sales ratio of 5. This explains why the stock is still below its IPO price. However, insiders have continued to be net buyers over the past year, and prominent investor Cathie Wood’s Ark Invest has been increasing its stake in the company.
Conclusion: Datadog Emerges as the Stronger Investment
While Datadog may experience some stagnation in its stock price until revenue growth and retention rates stabilize, it appears to have a more promising future compared to PagerDuty. PagerDuty must enhance its competitive position and accelerate growth relative to its larger competitors before it can be considered a compelling turnaround opportunity in the current volatile market.
Considering an Investment in Datadog
Before investing in Datadog, it’s crucial to note:
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Leo Sun does not hold any positions in the mentioned stocks. The Motley Fool has positions in and recommends Cisco Systems, Datadog, Dynatrace, Microsoft, PagerDuty, and ServiceNow. It also recommends International Business Machines and has the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
Better Cloud Stock: Datadog vs. PagerDuty was originally published by The Motley Fool