Datadog (DDOG 0.50%) dazzled investors with its breakneck growth rates after it went public in Sept. 2019. The data visualization company's revenue rose at a compound annual growth rate (CAGR) of 79% between 2017 and 2021, and it expects its revenue to rise another 60%-61% in 2022.
Datadog's stock soared from its IPO price of $27 to an all-time high of $196.56 in Nov. 2021, but it now trades at about $70 a share. At its peak, it was valued at $61 billion -- or 37 times the $1.65 billion in revenue it expects to generate in 2022. It's now worth $22 billion, or ten times the $2.21 billion in revenue it's expected to generate in 2023.
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In terms of multiples to revenue, that only makes Datadog slightly pricier than Microsoft (MSFT 0.37%), which trades at seven times next year's sales. But unlike Microsoft, Datadog isn't consistently profitable on a GAAP (generally accepted accounting principles) basis, so it's a much riskier investment. But could Datadog continue to grow, generate more multibagger gains, and eventually join the same mega-cap class as Microsoft by 2030?
The similarities between Datadog and Microsoft
Datadog and Microsoft might seem like very different companies, but they share similar roots. Datadog's namesake platform and Microsoft's Windows both make it easier to visualize and handle complex tasks.
Before Microsoft launched its first version of Windows in 1985, PC users ran their programs through text-based commands. Windows simplified that process with visual "windows" that could be controlled by a mouse. That transformation made PCs much easier for mainstream consumers to use, and became the foundation of Microsoft's entire business.
Datadog recognized a similar opportunity for growth in the IT services market. It's usually difficult and time-consuming for IT professionals to continuously monitor an organization's servers, databases, and software for problems in real time. Datadog broke down the silos between those platforms and aggregated all of that data onto unified visual dashboards, which made it much easier for IT professionals to diagnose problems.
That's why Datadog's number of high-value customers (meaning those that generated more than $100,000 in annual run-rate revenue, or ARR) rose more than tenfold from 240 at the end of 2017 to 2,600 at the end of the third quarter of 2022. Its dollar-based net retention rate, which gauges its year-over-year revenue growth per customer, also remains comfortably above 130%.
Could Datadog join the mega cap club?
Datadog's growth will likely cool over the next few years as its business matures. But for now analysts expect its revenue to grow at a CAGR of 42% between 2021 and 2024 and reach $2.98 billion by the final year.
If Datadog matches those estimates and continues to grow its revenue at a CAGR of 30% from 2024 to 2030, its annual revenue could reach nearly $15 billion by the final year. If it's still trading at ten times sales by then, it could be worth $150 billion. That would represent a near-seven bagger gain from its current levels but still fall short of the $200 billion mark for mega-cap stocks. It would also be worth a lot less than Microsoft's current market cap of $1.8 trillion.
Microsoft is growing a lot slower than Datadog, but analysts still expect its revenue to rise at a CAGR of 11% between fiscal 2022 (which ended last June) and fiscal 2025 to $275 billion. If it continues to grow at a modest CAGR of 10% through fiscal 2030, it could generate $370 billion in the final year. A price-to-sales ratio of seven would then give Microsoft a market cap of about $2.6 trillion by 2030, which would represent a gain of 40%-50% from its current levels.
But Datadog could still outperform Microsoft
We should be skeptical of those estimates, but Datadog probably won't come anywhere close to matching Microsoft's market cap by 2030. However, growth-oriented investors will still likely favor Datadog over Microsoft because its smaller market cap gives it more room for multibagger gains. Meanwhile, Microsoft should remain a stable software play for more conservative investors -- but it probably won't replicate its massive cloud-fueled gains from the past several years anytime soon.
