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 $34 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 70% in 2021 – 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. Shares ran as high as 190 before topping with most growth stocks in November and retreating down to the low 80s in June. Since that bottom, shares have traded 33% higher.
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 62.5% this year, with earnings per share expected to nearly double. The valuation 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 $11 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 and 2021 were a much more impressive 27% and 29%, respectively. This year, analysts are looking for 30% revenue growth again, though earnings are expected to be flat.
Like DDOG, DT peaked with growth stocks in November and subsequently traded down by as much as 60% in May. Shares quickly rebounded off the May lows and entered a trading range that it’s resided in since June.
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 triple that of Dynatrace and is growing much faster. But its revenue base is slightly smaller and is not as profitable.
Expectations for both cloud computing stocks are very high, though both already are well off all-time highs. You can view the recent pullbacks in both stocks as buying opportunities, though you might want to wait for DT to break out of its range before getting in.
Regardless of entry point, 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 their current 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!
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*This post has been updated from an original version, published in 2020.
