Evaluating Datadog and Snowflake: Are They Smart AI Investments?
Datadog (NASDAQ: DDOG) and Snowflake (NYSE: SNOW) offer innovative AI-driven solutions to optimize business operations. Datadog specializes in gathering diagnostic data from various software, consolidating it onto user-friendly dashboards, and integrating it into its Bits AI generative AI platform. This integration simplifies the process for IT professionals tackling software issues.
On the other hand, Snowflake utilizes its cloud-based data warehouse to gather and clean data from multiple applications, making it readily accessible for third-party analytics tools. Its Cortex AI platform empowers clients to analyze this data with AI algorithms and even develop custom AI solutions.
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Both Datadog and Snowflake reached their peak stock prices during the growth and meme stock surge in late 2021. Since then, they have seen significant downturns as overall growth has slowed and rising interest rates have led to reduced valuations. Presently, Datadog’s stock trades about 36% below its peak, while Snowflake is down approximately 71%. Investors are left wondering whether either stock remains a worthwhile long-term investment in the expanding AI market.
Datadog Shifts Focus to Profitability Amid Slowing Growth
Datadog gained traction in the IT diagnostics space, showcasing impressive revenue growth. Between 2019 and 2022, the company experienced a compound annual growth rate (CAGR) of 67%, with its number of large customers—those generating at least $100,000 in annual recurring revenue (ARR)—tripling. The dollar-based net retention rate, reflecting year-over-year ARR growth, consistently stayed above 130% during 2022.
However, in 2023, Datadog faced a revenue growth decline to only 27%. The number of large customers increased by just 15%, and by the fourth quarter, the dollar-based net retention rate fell to the mid-110s. The company attributed this slowdown to challenges in the enterprise software market and intensified competition from platforms like Cisco‘s AppDynamics, New Relic, Microsoft‘s Azure Monitor, and IBM‘s Instana. In response, Datadog reduced spending significantly and achieved profitability based on generally accepted accounting principles (GAAP) for the year.
During the first nine months of 2024, the dollar-based net retention rate remained in the mid-110s, while the number of large customers climbed by just 12%. For the full year, the company anticipates a 25% revenue increase. Analysts predict a CAGR of 24% for revenue through 2026, with GAAP net income expected to rise at a remarkable 96% CAGR.
While Datadog’s growth shows signs of maturing, opportunities remain in the expanding observability and AI markets. Although its enterprise value stands at $39.4 billion, making the stock seem expensive—trading at 64 times forward non-GAAP earnings and 12 times next year’s sales estimates—insider buying suggests continued confidence in the company.
Snowflake Struggles with Slowdown and Losses
Snowflake’s appeal stems from its flexible consumption-based pricing and compatibility with various cloud platforms, attracting businesses unwilling to commit to a single subscription service. From fiscal 2020 to fiscal 2023 (ending in January 2023), the company experienced extraordinary revenue growth at a CAGR of 98%, and its customer base tripled. The trailing-12-month net revenue retention rate only saw a slight decline, from 169% to 158%.
However, in fiscal 2024, revenue growth fell to 36%, and the increase in customers slowed to 22%, while the net revenue retention rate dropped to 131%. By the second quarter of fiscal 2025, it had declined further to 127%. Like Datadog, Snowflake attributed its slowdown to macroeconomic challenges, along with facing stiff competition from platforms like Databricks and integrated services from major cloud providers such as Microsoft Azure and Amazon Web Services (AWS).
For the current fiscal year, Snowflake expects its product revenue to grow by only 26%. Between fiscal 2024 and fiscal 2027, analysts project a CAGR of 24% for revenue, but the company continues to face deep GAAP losses.
Additionally, two concerning developments occurred in the past year: CEO Dan Slootman abruptly retired, and Berkshire Hathaway sold its entire stake. Insiders at Snowflake have also been net sellers over the last 12 months.
With an enterprise value of $35.8 billion, Snowflake appears cheaper than Datadog, trading at 8 times next year’s sales estimates. Nevertheless, persistent losses indicate potential unsustainability in its business model and may hinder growth, even in a favorable AI application environment.
Choosing Between Datadog and Snowflake: Datadog Emerges as the Stronger Buy
While Datadog’s price may be higher than Snowflake’s, its more stable growth and soaring profits, combined with the leadership of co-founder and CEO Olivier Pomel, present a more attractive investment opportunity than Snowflake at this time.
Is Datadog a Worthwhile Investment for $1,000 Right Now?
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Leo Sun has positions in Amazon and Berkshire Hathaway. The Motley Fool has positions in and recommends Amazon, Berkshire Hathaway, Cisco Systems, Datadog, Microsoft, and Snowflake. The Motley Fool recommends International Business Machines. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
