Snowflake (NYSE:SNOW) and Datadog (NASDAQ:DDOG) have both generated massive returns since their IPOs. Snowflake's stock has more than doubled in price since its IPO last September, while Datadog's stock has nearly quadrupled in value since its public debut in September 2019.
Both software stocks help large organizations break down data silos. Snowflake's cloud service gathers data across multiple computing platforms and centralizes the results so they can be read by data visualization services. Datadog's platform lets developers and IT professionals monitor the performance of different servers, databases, cloud services, and mobile apps on unified dashboards.
Snowflake and Datadog's tools help companies gain broader views of their infrastructure, streamline their operations, and make data-driven decisions. But which silo-busting stock will be the better overall investment for 2021?
The differences between Snowflake and Datadog
Snowflake and Datadog might seem superficially similar, but their platforms are very different.
Snowflake's platform allows users to store, manage, analyze, and share high volumes of structured and semi-structured data. Unlike a traditional data storage network -- which includes multiple databases, data warehouses, and data lakes -- Snowflake breaks down those silos and places the data on a unified platform where it can be accessed by data visualization services like salesforce.com's Tableau.
Datadog makes sure services like Snowflake are running properly. Through Datadog, IT professionals can view Snowflake's platform and optimize its storage usage, monitor its performance, and detect misconfigurations and security threats. In other words, Snowflake stores and crunches the data, while Datadog makes sure the entire system is running smoothly -- along with hundreds of other services.
Which company is growing faster?
Snowflake's revenue soared 174% to $264.7 million in fiscal 2020, and surged another 127% year over year to $401.6 million in the first nine months of fiscal 2021 (which started last February).
Its total number of customers rose 14% sequentially to 3,554 in the third quarter. Within that total, 65 of its customers generated more than $1 million in trailing 12-month product revenue, up from 56 in the second quarter. Snowflake also ended the third quarter with a net retention rate of 161% -- which means its existing customers spent 61% more on its services year over year.
Snowflake expects its product revenue, which accounts for over 90% of its top line, to rise 113%-115% for the full year. Analysts expect its total revenue to rise 119% this year and 89% next year. However, Snowflake isn't profitable by GAAP or non-GAAP metrics, and analysts expect it to remain unprofitable for the foreseeable future.
Datadog's revenue rose 83% to $362.8 million in fiscal 2019, and it grew another 71% year over year to $425.9 million in the first nine months of 2020.
It ended the third quarter with 1,107 customers generating more than $100,000 in annual recurring revenue, up from 727 a year earlier. It also noted that 20% of its customers were using four or more of its products, up from just 7% a year ago, which indicates its "land and expand" strategy -- in which it signs on customers with a single service to cross-sell additional ones -- is paying off. Datadog also maintained a healthy net retention rate of over 130%.
Datadog is growing at a slower rate than Snowflake, but it's more profitable. Its GAAP net loss narrowed year over year from $17.6 million to $8.4 million in the first nine months of 2020, and it generated a non-GAAP net profit of $52.5 million -- compared to a loss of $11.5 million a year ago.
Datadog expects its revenue to rise 62%-63% for the full year, and for its non-GAAP earnings to stay in the black. Next year, analysts expect Datadog's revenue and non-GAAP earnings to rise 36% and 6%, respectively.
The valuations and verdict
Snowflake and Datadog trade at 73 times and 40 times next year's sales estimates, respectively. Those frothy price-to-sales ratios could limit the upside potential for both stocks this year, especially if investors rotate from high-growth tech stocks to battered value stocks in unloved sectors after the pandemic passes.
That being said, I'd rather buy Datadog than Snowflake up here, because it's cheaper relative to its sales, it's profitable, and it's plugged into the same silo-busting secular trend as its pricier peer.