Snowflake (SNOW 3.69%) and Datadog (DDOG 4.95%) are both hypergrowth cloud companies that simplify complicated tasks. Snowflake pulls all of a company's data from different computing platforms into a centralized data warehouse where it can be easily accessed by third-party applications. Datadog collects real-time diagnostic data across a company's entire software infrastructure and then aggregates that information onto unified dashboards to help IT professionals spot potential problems.
I previously compared these two companies near the apex of the growth stock rally in late 2021 and concluded that Datadog's milder slowdown, higher adjusted profits, and lower valuation made it a safer bet than Snowflake. Unfortunately, neither stock survived the subsequent meltdown in hypergrowth stocks as the macro headwinds intensified and interest rates rose. After I made that call, Datadog's stock declined 46%, and Snowflake's stock dropped 56%.
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So, in hindsight, the right call would have been to avoid both stocks until their valuations cooled off. But now that both of these hypergrowth stocks have been crushed, is it time to buy Snowflake or Datadog as a turnaround play?
Snowflake still faces near-term headwinds
Snowflake's product revenue (which accounts for most of its top line) surged 120% in fiscal 2021 (which ended in Jan. 2021) and soared another 106% in fiscal 2022. Its net revenue retention rate, which gauges its year-over-year revenue growth per customer, also rose improved from 168% in fiscal 2021 to 178% in fiscal 2022.
Those explosive growth rates drove Snowflake's stock from its IPO price of $120 on Sept. 16, 2020, to its all-time high of $401.89 on Nov. 16, 2021. The bulls also didn't seem to mind that it was deeply unprofitable by both generally accepted accounting principles (GAAP) measures and non-GAAP measures.
But Snowflake's investors faced a reality check in fiscal 2023 when its product revenue rose 70% as its net revenue retention rate slipped to 158%. It expects its product revenue to only rise 34% in fiscal 2024.
That slowdown was caused by the macro headwinds, which forced many companies to rein in their software spending. As a result, its bubbly valuations popped, and its stock dropped back to about $150. Nevertheless, Snowflake still seems on track to achieve its long-term goal of generating $10 billion in product revenue in fiscal 2029. Reaching that target would require it to grow its product revenue at a compound annual growth rate (CAGR) of at least 31% from fiscal 2024 to fiscal 2029.
Snowflake also turned profitable on a non-GAAP basis in fiscal 2023 as its adjusted gross and operating margins expanded. And unlike many other tech companies, it plans to significantly expand its workforce this year instead of executing mass layoffs to cut costs. Analysts expect its revenue and non-GAAP earnings per share (EPS) to grow 34% and 148%, respectively, in fiscal 2024.
But Datadog faces a deeper slowdown
Datadog's revenue surged 83% in 2019, 66% in 2020, and 70% in 2021. Those rapid growth rates boosted its stock from its IPO price of $27 on Sept. 19, 2019, to a record high of $196.56 on Nov. 9, 2021. But today, it's worth about $90.
Like Snowflake, Datadog lost its luster as its growth cooled off. Its revenue rose 63% in 2022, but it expects just 22% to 23% growth in 2023. Like most of its peers, it blamed that slowdown on the macro headwinds for enterprise spending.
Datadog is also struggling to gain more high-value customers, which generate at least $100,000 in annual recurring revenue. That higher-value cohort only grew 24% year over year in the second quarter of 2023, compared to its 54% growth a year ago. It also still faces stiff competition from similar observability companies like Cisco's AppDynamics and New Relic.
As Datadog's growth decelerates, it's tightening up its spending to stabilize its margins. It hasn't announced any major layoffs, but it plans to "moderate" its hiring place this year. It's still unprofitable by GAAP measures, but its non-GAAP earnings more than doubled in 2022. It expects its non-GAAP EPS to rise 33% to 37% this year.
Datadog hasn't set any clear one-term goals like Snowflake, but analysts expect its revenue to grow at a slower CAGR of 26% from 2022 to 2025. Snowflake is expected to grow at a CAGR of 31% between fiscal 2023 and fiscal 2026.
The valuations and verdict
Snowflake and Datadog trade at 18 and 15 times this year's sales, respectively. Snowflake still looks slightly pricier than Datadog, but it's also growing faster, expanding more aggressively, and it's laid out clearer long-term targets. Those three core strengths should make it a more appealing growth play than Datadog for the foreseeable future.
