Which is a Better Investment Right Now: Snowflake or Datadog?

Snowflake and Datadog are two growth companies that operate in the cloud vertical, making them solid bets for long-term investors.

Dec. 3, 2021

Investing in businesses that provide enterprise-facing cloud-based solutions is a solid long-term bet. According to a report from Markets and Markets, the global cloud computing segment is forecast to grow from $445.3 billion in 2021 to $947.3 billion in 2026, indicating an annual growth rate of 16.3%. 

An expanding addressable market provides companies enough room to grow their top-line rapidly, making Snowflake (NYSE: SNOW) and Datadog (NASDAQ: DDOG) enticing bets right now. Let’s see which between the two companies is a better investment right now.

Snowflake: Bull vs. Bear arguments

Snowflake is one of the fastest-growing companies in the tech sector that provides a cloud-based data platform for organizations. Founded in 2012, Snowflake is currently valued at a market cap of $108 billion. The Snowflake platform allows users to store, access, and consolidate data that allow them to gain actionable business insights.

Its suite of products and solutions has allowed the company to report sales of $592 million in fiscal 2021 (ended in January), up from just $96.66 million in fiscal 2019.

SNOW stock soared by almost 16% on Dec. 2 after it reported fiscal Q3 of 2022 sales of $334.3 million, which was an increase of 110% year over year, higher than Wall Street revenue estimates of $305.6 million.

Snowflake continues to expand its customer base which grew by 52% year over year to 5,416. Its net revenue retention rate also stood at a healthy 173% which suggests existing customers have increased spending by 73% in the last year.

Snowflake stock is up close to 50% in the last six months making it unattractive to value investors. The company remains unprofitable but is forecast to increase revenue by 93.9% to $1.15 billion in fiscal 2022 and by 63.7% to $1.88 billion in fiscal 2023, valuing it at a forward price to 2023 sales multiple of 58x which is extremely lofty.

Datadog: Bull vs. Bear arguments

Datadog provides monitoring and analytics platforms for users. Its SaaS platform offers real-time analysis of the technology stack for customers. 

Datadog’s Q3 sales increased by 75% year over year to $270 million while the number of customers generating over $100,000 in annual recurring revenue rose by 66% to 1,800. 

Comparatively, the company’s RPO or remaining performance obligations more than doubled to $719 million in the quarter ended in September. The RPO metric calculates the total value of contracts that are outstanding or yet to be paid by the customer.

Datadog is also experiencing high customer engagement rates as 31% of total customers use four or more products, up from just 20% in the year-ago period.

Datadog stock has surged by 72% since the start of 2021, valuing the company at a market cap of $52.8 billion. Analysts expect revenue to rise from $603.5 million in 2020 to $1.4 billion in 2022, valuing DDOG stock at a forward price to sales multiple of 38x which is also sky-high.

So, which stock is a better buy right now?

Both Datadog and Snowflake are quality growth stocks trading at a premium. But Datadog’s lower valuation multiples and adjusted profitability make it a better investment compared to Snowflake right now.

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