Observability Wars: Datadog and Dynatrace Vie for Data Dominance

Key Points

• The data observability market is fast-growing and highly competitive, particularly given the surging demand for AI and cloud products.
• Datadog and Dynatrace are two firms specifically focused on observability in AI and the cloud.
• While both have strong growth prospects, Datadog may have an advantage in customer loyalty and guidance, while Dynatrace comes out on top by valuation metrics.

Amid the rise of cloud computing and AI, companies across many industries are generating significantly more data than they may have previously. The data observability business has grown rapidly to accommodate this. By using tools dedicated to monitoring this data and extracting insights, companies may be able to improve operations and reduce costs. The data observability market is small, at just $2.7 billion as of 2023, but it is growing quickly. Through 2030, this market is expected to increase at a CAGR of 10.7%.

Some legacy software and infrastructure firms offer observability platforms as part of a broader array of products. AppDynamics by Cisco Systems Inc. NASDAQ: CSCO is a prominent example. On the other hand, smaller companies that have emerged in recent years have also dedicated themselves specifically to this burgeoning market. Two of the leading firms in that latter category are Datadog Inc. NASDAQ: DDOG and Dynatrace Inc. NYSE: DT. Investors interested in focusing specifically on data observability might look to these two companies first. Fortunately, for the sake of comparison, both companies reported recent fiscal results on the same day in early November 2024.

Datadog: Solid Earnings Performance, Boosted Guidance, Loyal Customers

Datadog beat analyst predictions for the third quarter of 2024 on both the top and bottom lines. Revenue of $690 million improved by 26% year-over-year, while adjusted profit climbed to 46 cents per share, up 10 cents relative to this time in 2023. The company also raised its full-year revenue guidance to $2.66 billion from a previous high of $2.63 billion and its full-year adjusted profit to between $1.75 and $1.77, while previously the firm expected a range of $1.62 to $1.66 per share.

Datadog's AI-based cybersecurity product lineup is driving both last quarter's gains and future optimism. The firm's products observe cloud infrastructure, which is key to most AI platforms. Notably, Datadog's growing customer base is extremely dedicated, with 83% of customers using two of its products and even 26% of customers using six or more Datadog products.

Datadog's up-and-coming products are likely to drive further growth as well. The company has seen traction with its large language model observability product, as roughly 3,000 of its customers use a Datadog AI integration. The company has also seen strong early interest in the initial roll-out of its On-Call product, designed to provide real-time incident management service.

27 out of 30 analysts that have rated Datadog have given the stock a Buy, and shares have a consensus price target of $143.56, nearly 11% higher than current levels. And this is after the company has already boosted its share price by more than 26% this year.

Dynatrace: Outperformance in Earnings, No Revision to Annual Recurring Revenue Guidance

Dynatrace posted year-over-year gains, with total revenue rising 19% to $418 million and adjusted earnings reaching 37 cents per share, up from 31 cents last year. Despite these improvements, its shares fell slightly after the earnings report, while Datadog’s shares rose.

Part of the reason for this post-earnings slump could be that the company only slightly boosted its total revenue guidance for the full fiscal year. 

That boost comes from subscriptions rather than the more highly coveted annual recurring revenue segment.

One advantage that Dynatrace has over Datadog is its relative value. Dynatrace has a forward P/E ratio of 79.6, significantly lower than Datadog's 306.5. Dynatrace also maintains a lower P/S ratio (11.2 vs. 20.4) and a lower price-to-free-cash-flow ratio (78.0 vs. 321.5).

Dynatrace also maintains a debt-free balance sheet, allowing it more flexibility with incoming cash.

The firm's stock has been relatively level for much of the past year, although in recent months, it has risen, bringing its 1-year return to just over 11%.

Which Comes Out on Top?

The competition between Datadog and Dynatrace is fierce, with both companies seeking an edge in AI and infrastructure observability. Analysts seem generally optimistic about both firms, though Datadog may have an advantage based on expectations through the end of the year, and Dynatrace may take the lead when it comes to valuation metrics. Ultimately, both companies are part of a fast-growing industry with significant growth potential.