Better Cloud Stock: Datadog vs. PagerDuty

Datadog (DDOG 2.33%) and PagerDuty (PD -1.27%) both help IT teams monitor and manage their software and hardware infrastructure through cloud-based services. Datadog’s platform provides IT professionals with real-time visibility into a company’s infrastructure, applications, and logs through unified dashboards. That streamlined approach helps them spot potential problems before they become more serious issues. PagerDuty’s platform helps IT professionals quickly respond to major incidents by organizing their on-call schedules, escalation policies, and alert mechanisms.

Datadog and PagerDuty both went public in 2019. Datadog’s stock has surged 388% since its IPO, but PagerDuty still trades about 8% below its debut price. Let’s see why the proactive player outperformed the reactive one by such a wide margin.

An IT professional checks a computer screen.

Image source: Getty Images.

How fast is Datadog growing?

Datadog’s revenue increased at a compound annual growth rate (CAGR) of 67% from 2019 to 2022, while its number of large customers — which generated at least $100,000 in annual recurring revenue (ARR) — more than tripled.

But in 2023, its revenue only rose 27% as its large customer base grew 15%. Its net dollar-based retention rate, which stayed above 130% in all of 2022, slipped to the mid-110s by the end of 2023. Like many of its industry peers, Datadog attributed that deceleration to the macro headwinds that drove many companies to rein in their cloud spending. But on the bright side, it turned profitable on a generally accepted accounting principles (GAAP) basis in 2023 as it trimmed its expenses.

Looking ahead, Datadog still faces fierce competition from similar platforms like Cisco‘s AppDynamics, Dynatrace, New Relic, LogicMonitor, Microsoft‘s Azure Monitor, and IBM‘s Instana. Its core market is also maturing: The global observability tools and platform market might only expand at a CAGR of 11.7% from 2023 to 2028, according to Markets and Markets.

From 2023 to 2026, analysts expect Datadog’s revenue to grow at a CAGR of 25% as its GAAP EPS increases at a CAGR of 85%. Those growth rates are impressive, but its stock isn’t cheap at 78 times its forward adjusted earnings and 17 times this year’s sales. That’s probably why Datadog’s only advanced about 9% this year, and why its insiders sold slightly more shares than they bought over the past 12 months.

How fast is PagerDuty growing?

From fiscal 2020 to fiscal 2023 (which ended in January 2023), PagerDuty’s revenue rose at a CAGR of 30% as its total number of paying customers grew 20%. It’s still unprofitable on a GAAP basis, but its non-GAAP earnings turned positive in 2023.

But in fiscal 2024, PagerDuty’s revenue only grew 16% as its total number of paying customers declined 1%. Its dollar-based retention rate slipped to 107% in the fourth quarter — compared to 120% a year earlier. Like Datadog, it seems to be struggling with the tough macro headwinds for the cloud software market. But it also operates in a crowded market filled with bigger competitors like Cisco’s Splunk and the digital workflow services leader ServiceNow.

From fiscal 2024 to fiscal 2027, analysts expect PagerDuty’s revenue to increase at CAGR of only 12% as its adjusted earnings grow at a CAGR of 20%. To put that into perspective, ServiceNow generated more than 20 times as much revenue as PagerDuty last year, but it’s expected to grow its revenue at a CAGR of 21% from 2023 to 2026. ServiceNow is also firmly profitable on a GAAP basis.

Based on those lackluster estimates, PagerDuty’s stock isn’t cheap at 33 times forward earnings and 5 times this year’s sales. That’s probably why its stock still trades at discount to its IPO price. However, its insiders have still been net buyers over the past year, and Ark Invest’s Cathie Wood has been accumulating more shares in recent months.

The better buy: Datadog

Datadog’s stock might tread water at these levels until its revenue growth and retention rates stabilize, but it seems to have a much brighter future than PagerDuty. PagerDuty needs to meaningfully widen its moat and grow faster than its larger competitors again before I consider it to be a worthwhile turnaround play in this choppy market.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Cisco Systems, Datadog, Dynatrace, Microsoft, PagerDuty, and ServiceNow. The Motley Fool recommends International Business Machines and recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.

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