Fortune Magazine regularly teams up with analysts from Boston Consulting Group to publish an annual edition of the Fortune Future 50. The latest report ranked more than 1,700 public companies based on their long-term revenue growth prospects. Two technology specialists topped the list in 2023: Datadog (DDOG 4.95%) ranked second and Snowflake (SNOW 3.69%) ranked first.
Notably, the first Fortune Future 50 list was published in 2017, and every cohort since has beat the S&P 500 and S&P 500 Growth indexes in terms of revenue growth. Most cohorts have also beat the market in terms of total returns, and the authors believe the laggards (2020 and 2021) could outperform in the long run.
Here's what investors should know about Datadog and Snowflake.
1. Datadog
Datadog sells observability software that provides real-time visibility across enterprise IT environments, helping development and operations teams avoid or resolve performance issues. Its platform includes about two dozen products that span several end markets, including infrastructure monitoring, application monitoring, and developer experience. Its software also leans on artificial intelligence (AI) to separate signals from noise and automate investigative workflows.
Datadog is a recognized leader in several observability end markets, including AI for IT operations. The company aims to build on that reputation with two new generative AI products. LLM Observability is a monitoring solution for the large language models that power generative AI applications, and Bits AI is a natural language interface that helps developers understand, troubleshoot, and fix application issues.
Datadog delivered a strong beat in the third quarter, exceeding expectations on the top and bottom lines. Revenue rose 25% to $547 million due to robust new customer growth and increased spending among existing clients. And non-GAAP net income jumped 96% to $158 million as the company continued to focus on cost control. Management expects similar growth in the fourth quarter.
Observability software becomes more important as IT environments become more complex. That means Datadog has strong tailwinds at its back in trends like cloud computing, AI adoption, and other digital transformation projects. Additionally, Datadog is an observability leader, and its ability to keep pace with market trends (as evidenced by its rapid release of generative AI products) should keep the company in growth mode for years to come.
Wall Street expects Datadog to increase sales by 26% annually over the next five years. That consensus forecast makes its current valuation of 20.2 times sales seem reasonable, especially when the three-year average is 30.5 times sales. Long-term investors should consider buying a small position in this growth stock today, meaning no more than 1%-2% of their portfolios.
2. Snowflake
Snowflake helps businesses make sense of big data and build data-driven applications. Its platform supports a broad range of workloads, including data ingestion, storage, analytics, and AI model development. Additionally, the Snowflake marketplace supports data sharing and monetization, creating a network effect that makes its platform more valuable with each new uploaded data set.
CEO Frank Slootman says data-sharing capabilities mean Snowflake is "uniquely positioned to enable AI workloads." The company is leaning into that advantage by integrating Nvidia chips and pre-trained models that support AI application development. Additionally, Snowflake recently announced two generative AI tools for non-technical users. Document AI lets users extract document data, and Snowflake Copilot lets users analyze data with natural language.
Snowflake reported solid results in the third quarter. Its customer count jumped 24% and the average customer spent 35% more. In turn, revenue rose 32% to $734 million and non-GAAP net income soared 133% to $90 million. Management also spoke optimistically on the earnings call, highlighting stronger customer usage patterns correlated with an improving macroeconomic environment.
Like observability software, data management and analytics tools become more important as IT environments become more complex. Businesses that can harness data for decision-making and product development stand to gain an edge over their peers. The Snowflake data cloud makes that possible. Better yet, it runs across all three major public clouds, offering more flexibility than similar solutions from vendors like Amazon and Microsoft.
Wall Street expects Snowflake to grow sales by 32% annually over the next five years. That consensus estimate makes its current valuation of 25.2 times sales seem somewhat tolerable, though it certainly isn't cheap. Patient investors comfortable with volatility should consider buying a very small position in Snowflake stock today, no more than 1% of their portfolios.
