Domo (DOMO -1.41%) and Datadog (DDOG -3.94%) might not be familiar names to many tech investors, but both cloud-oriented stocks outperformed the Nasdaq Exchange's 30% rally over the past 12 months.
Domo's stock price rose over 130% as it generated stable growth with rising margins and narrowing losses. Datadog's stock price advanced more than 60% as it generated robust sales growth with rising profits. Let's see why both stocks impressed the bulls -- and if either stock is worth buying right now.
image source: Getty Images.
What do Domo and Datadog do?
Domo and Datadog both break down silos across companies and pull their fragmented data onto unified dashboards. However, the two companies break down different types of silos.
Domo's platform enables executives to manage their companies through their phones via data visualization and management tools. It gathers data from a wide range of computing platforms and software applications, then organizes that data onto a unified dashboard to help executives make informed business decisions. Domo also provides collaboration and marketing tools for employees.
Datadog's platform enables IT professionals to simultaneously monitor the performance of multiple servers, databases, cloud services, applications, and mobile apps through unified dashboards. That unified view makes it easier to diagnose problems while saving a lot of time and money.
How fast are Domo and Datadog growing?
Domo's revenue rose 22% in fiscal 2020, grew 21% in fiscal 2021, and increased 23% year over year to $123 million in the first half of 2022. It expects its revenue to rise 20%-22% for the full year.
Domo's growth is steady because it generated 87% of its revenue from subscriptions in the first half of 2021. It ended the second quarter with a net retention rate of over 100%, while 60% of its customers were locked into multi-year contracts -- compared to 58% in the prior-year quarter.
The gross margin of that subscription revenue has also gradually expanded over the past three and half years, supported by the stickiness of its services and lower cloud hosting costs.
Datadog's revenue rose 83% in fiscal 2019, grew 66% in fiscal 2020, and increased 59% to $432 million in the first half of 2021. It expects its revenue to rise 55%-56% for the full year.
Datadog's gross and operating margins expanded in 2020, but its gross margin dipped in the first half of 2021 as it integrated its recent acquisitions of the data visualization companies Timber and Sqreen.
Datadog has kept its dollar-based net retention rate above 130% for 16 straight quarters. Last quarter, 70% of its customers were using two or more of its products, up from 68% in the prior-year quarter. Those numbers indicate Datadog's "land and expand" model -- wherein it locks in a customer with a single product to cross-sell additional ones -- is still paying off.
Which company has a clearer path toward profitability?
Neither of these companies is consistently profitable on a GAAP basis yet. But on a non-GAAP basis, Datadog is in much better shape than Domo.
Domo's non-GAAP net loss narrowed from $103 million in fiscal 2020 to $51 million in fiscal 2021, then narrowed again year over year from $29 million to $18 million in the first half of fiscal 2022. Analysts expect its non-GAAP net loss to narrow for the full year.
Datadog generated a non-GAAP net profit of $72 million in fiscal 2020, compared to a net loss of $471,000 in 2019. In the first half of 2021, its non-GAAP net income increased 44% year over year to $52 million. Wall Street expects its non-GAAP earnings to rise 27% this year.
Which stock is more reasonably valued?
Domo trades at 11 times this year's sales. That makes it comparable to Salesforce (CRM -0.57%), which expects to grow its revenue 23%-24% this year and trades at 10 times that estimate.
Datadog trades at 45 times this year's sales. Datadog is growing about as fast as Twilio (TWLO -1.49%). Analysts expect Twilio's revenue to rise 52% this year, and its stock trades at 24 times that forecast.
Based on those comparisons, Domo seems much more reasonably valued than Datadog, which is arguably priced for perfection at these frothy levels.
The winner: Domo
Domo generates predictable growth at a reasonable valuation, while Datadog generates faster -- but decelerating -- growth at a much higher valuation.
I'm not a big fan of either stock right now. Domo's growth is stable, but Salesforce -- which competes against Domo with Tableau -- is generating stronger growth at a lower valuation. Salesforce is also consistently profitable by GAAP and non-GAAP measures.
Datadog's revenue growth is impressive and its profitability is improving, but its stock is simply too expensive. If Datadog's growth abruptly stalls out and it loses ground to similar companies like Splunk, investors shouldn't be surprised if its stock gets cut in half.
So for now, I believe Domo is the better cloud-oriented play, and it should continue to outperform Datadog throughout the rest of the year. However, investors should shop around before deciding if Domo is the right fit for their portfolios.
