Why Datadog, Snowflake, and Other Cloud Stocks Rallied on Friday

One of the hallmarks of the recent economic downturn was a pause in the digital transformation, marked by a dramatic pullback in cloud spending, as companies turned to cloud optimization in an effort to more efficiently use their existing services. The financial results released by one company today suggest that customers are beginning to pile back into cloud services, which could mark the end of a historic dry spell.

As of 2:56 p.m. ET on Friday, Datadog (NASDAQ: DDOG) stock had risen 3.6%, Snowflake (NYSE: SNOW) had climbed 4.9%, and MongoDB (NASDAQ: MDB) had jumped 6.5%.

A check of all the usual sources — regulatory filings, earnings results, and changes to analysts’ price targets — turned up nothing in the way of company-specific news to explain the moves. Rather, it was the robust results of a rival cloud provider that helped propel them higher.

Image source: Getty Images.

A rebound in cloud spending?

Roaring out of the gate this morning was Cloudflare. The cloud and edge computing specialist reported fourth-quarter revenue that grew 32% year over year to $362.5 million, while adjusted earnings per share (EPS) surged 150% to $0.15. This was well ahead of analysts’ consensus estimates of $353 million and EPS of $0.12, and investors let out a collective cheer — driving the stock up more than 20% (as of this writing).

Cloudflare also reported metrics that suggested cloud customers were opening their wallets. The company signed a record number of customers spending $500,000 and $1 million, as new annual contract value (ACV) soared 40%, marking the fastest pace of growth since 2021.

This continued a recent trend, suggesting that businesses are beginning to put the downturn behind them and resume spending on cloud computing services.

How will other cloud stocks benefit?

A general rebound in cloud spending will benefit each of these cloud providers:

  • Datadog provides an expanding and integrated suite of cloud monitoring, analytics, and security tools that help customers keep their sites up and running while spotting anomalies before they result in critical downtime. Last quarter, the company cited strong growth of larger customers, and Cloudflare’s results suggest that trend is continuing.

  • Snowflake’s cloud-based data warehouse and analytics platform offers consumption-based pricing, which let users dial down their spending when the economy tanked. As conditions improve, those same users will likely ramp up spending again, which bodes well for Snowflake.

  • MongoDB offers cloud-centric database solutions that are much more robust than traditional databases. The company was recently named “best-of-breed” by D.A. Davidson analyst Rudy Kessinger, who called it “the clear NoSQL market leader” in a “very attractive” $80 billion database market.

More broadly, cloud spending is forecast to ramp back up in 2024 after a downturn-induced deceleration. Worldwide public cloud spending is expected to reach $679 billion in 2024, an increase of more than 20%, according to the technology research and consulting firm Gartner.

Are cloud stocks a buy?

To be clear, none of these three stocks is cheap in terms of traditional valuation metrics. Snowflake, MongoDB, and Datadog are currently selling for 16 times, 14 times, and 13 times next year’s sales, respectively, when a reasonable price-to-sales ratio is generally between 1 and 2.

SNOW Revenue (Quarterly) Chart

SNOW Revenue (Quarterly) Chart

However, valuation should never be viewed in a vacuum. Investors have historically awarded a higher valuation to companies with continued strong revenue growth. Snowflake, Datadog, and MongoDB all qualify, having grown quarterly revenue by 221%, 176%, and 138%, respectively, over the past three years.

For investors planning to hold their shares for the coming three to five years, these stocks represent an intriguing opportunity that could generate significant gains over time.

Should you invest $1,000 in Snowflake right now?

Before you buy stock in Snowflake, consider this:

The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Snowflake wasn’t one of them. The 10 stocks that made the cut could produce monster returns in the coming years.

Stock Advisor provides investors with an easy-to-follow blueprint for success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks each month. The Stock Advisor service has more than tripled the return of S&P 500 since 2002*.

See the 10 stocks

*Stock Advisor returns as of February 5, 2024

Danny Vena has positions in Cloudflare, Datadog, MongoDB, and Snowflake. The Motley Fool has positions in and recommends Cloudflare, Datadog, MongoDB, and Snowflake. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.

Why Datadog, Snowflake, and Other Cloud Stocks Rallied on Friday was originally published by The Motley Fool