Cloud computing stocks are one of the hottest segments of the market. Let’s break down my two favorite and see which comes out on top.
As cloud infrastructure from Microsoft, Amazon and Google becomes the backbone of so many computing environments the margin for error on hosted applications has become razor thin.
If a core solution goes down for even a short spell that could mean disaster—or at the very least, very angry customers.
The rise of cloud computing has led to a surge in demand for cloud infrastructure monitoring to make sure all is working as it should.
Two of the emerging players are Datadog (DDOG) and Dynatrace (DT). Let’s take a look at these two cloud computing stocks and see which one looks better right now.
Cloud Computing Stock #1: Datadog (DDOG)
Datadog, with a market cap of $44 billion, is one of the leaders in the cloud infrastructure monitoring market. It’s particularly strong in public cloud monitoring and is rapidly expanding into the private cloud and on-premise environments as well.
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The company’s supernormal growth rate – revenue was up 66% in 2020 – reflects that Datadog is signing customers left and right. Why?
Datadog has what’s arguably the best platform across the three core markets in monitoring. These include infrastructure monitoring (where it is the leader), application program monitoring (APM), and logging.
It hasn’t been as strong in the latter two markets, where Dynatrace, which I’ll discuss in a minute, and Splunk (SPLK) are the respective leaders. That said, Datadog is likely the best positioned to grab customers who want one vendor to cover their needs across all three monitoring markets.
The company went public at 27 in September 2019, got off to a strong start and worked its way to 50 just prior to the pandemic. A sharp pullback of 40% set the stage for a fierce rally that didn’t abate until DDOG hit 117 this February.
A good portion of that rally was fueled by both current and anticipated demand for monitoring solutions due to the work-from-home (WFH) movement and other factors driving users to cloud-based environments.
Looking forward, analysts expect Datadog to grow revenues by another 46.8% this year, though earnings per share are expected to dip a bit. The valuation (a forward price-to-earnings ratio of 345!) is sky-high, but that hasn’t slowed DDOG down much in the past. The long-term trajectory and outlook for this stock remains very much up.
Cloud Computing Stock #2: Dynatrace (DT)
Dynatrace, which has a market cap of $20 billion, plays in the same general market as Datadog but comes at it from a different angle. The company is best known for strength in application performance monitoring (APM), an area where a new state-of-the-art platform better meets customer needs across on-premise, private cloud, and public cloud solutions.
Like Datadog, Dynatrace is also branching out into other areas of monitoring, including infrastructure monitoring (Datadog’s strength) and log management (Splunk’s strength).
The company’s historical financial statements are somewhat messy because it was spun out by Thoma Bravo in 2014. Management retooled the business from 2013 to 2016 to take advantage of newer technologies and transition to a subscription business model, which coincided with the release of the aforementioned platform.
This transition is why fiscal 2019 revenue was only up 8%, but revenue growth in fiscal 2020 was a much more impressive 27%. Adjusted EPS was $0.30. This year, analysts are looking for 27% revenue growth again, though earnings are expected to be flat.
Like DDOG, DT was doing well before the pandemic then went through a sharp correction before surging to new all-time highs. DT peaked at 56 in February, tumbled to as low as 44 in May, but has since been racing to new highs above 70!
Here’s what the chart looks like.
Which Cloud Computing Stock is the Better Buy?
Like many stocks that get lumped into the same group, Datadog and Dynatrace are similar, but different. In their specialized monitoring market they’re each stronger in different areas. Datadog has a market cap that’s twice that of Dynatrace and is growing much faster. But its revenue base is slightly smaller and is not as profitable.
Expectations for both stocks are very high, though both are already trading at or near all-time highs. It might make sense to wait for a cooling-off period with either stock before jumping in with two feet.
Still, both stocks represent ways to play future demand for automating and monitoring cloud-based computing environments.
For investors that want exposure to this market I wouldn’t advocate buying one over the other at this stage. Just like there’s no reason to argue for owning Microsoft (MSFT) over Amazon (AMZN), or Visa (V) over Mastercard (MC), or so many other great companies that play in the same sandbox, both Datadog and Dynatrace are attractive to me.
It’s not out of the realm of possibilities to see a tie-up of these two companies in the future, or see one (or both) be acquired by other large tech firms looking to boost their infrastructure monitoring offerings.
Long-term growth investors could do a lot worse than starting to accumulate a position in both DDOG and DT on pullbacks.
For investors currently in these cloud computing stocks, I think both are good to hold on to given the future growth potential.
Do you own any cloud computing stocks not named Dynatrace or Datadog? Tell us about them in the comments below!
Tyler Laundon is chief analyst of Cabot Small-Cap Confidential and Cabot Early Opportunities. The circulation of Small-Cap Confidential is strictly limited because the undiscovered stocks with sky-high-potential that Tyler recommends are often low-priced and thinly traded. Don’t share these recommendations!Learn More
*This post has been updated from an original version, published in 2020.