In this article, I have evaluated prominent software stocks, Datadog, Inc. (DDOG) and Akamai Technologies, Inc. (AKAM) to determine the better buy. After thoroughly evaluating these stocks, I think AKAM is gaining more attention than DDOG for the reasons discussed in this article.
The software industry is set to grow due to increased business digitalization, cloud technology advancements, and overall digital transformation efforts. Government regulations promoting cloud services to reduce carbon emissions are also expected to boost growth in this sector.
The global software market is projected to expand at a CAGR of 11.5% until 2030.
Furthermore, the Software-as-a-Service (SaaS) model is gaining popularity among both individual users and companies. It offers a solution to manage intricate and expensive integrated application environments while reducing implementation timelines.
The global SaaS market is expected to reach $720.44 billion by 2028, growing at a CAGR of 25.9%.
While AKAM has gained 31.6% over the past year, DDOG has gained marginally. AKAM’s 20.1% return over the past three months compares to DDOG’s 7.3% decline. Additionally, AKAM’s 26% return year-to-date is higher than DDOG’s 17.8% gain.
Here are the reasons why I think AKAM might perform better in the near term:
Recent Developments
On August 3, DDOG and Pinecone, the vector database company providing long-term memory for AI, announced that they had integrated their services to meet the growing demand from enterprise organizations.
This integration enables developers to access enterprise-level observability and monitoring tools for building high-performance GenAI applications more efficiently.
Conversely, on September 26, AKAM announced that Ateme had joined the Akamai Qualified Computing Partner Program. Ateme is a global leader providing end-to-end video compression, delivery, and streaming solutions with innovation at its core.
Moreover, on September 20, AKAM announced a global partnership with Corero Network Security, the specialists in distributed denial-of-service (DDoS) protection solutions. Akamai is now offering Corero's on-premises DDoS protection to extend Akamai Prolexic, AKAM's own comprehensive portfolio of DDoS security solutions.
Recent Financial Results
DDOG’s total revenue increased 25.4% year-over-year to $509.45. million in the fiscal second quarter that ended June 30, 2023. However, its total operating expenses rose 31.2% from the previous-year quarter to $429.62 million and operating loss rose 601.1% year-over-year to $22.01 million.
On the contrary, AKAM’s revenues for the fiscal second quarter that ended June 30, 2023, increased 3.6% year-over-year to $935.72 million. Its operating income amounted to $145.79 million. Its non-GAAP net income rose 5.3% year-over-year to $227.99 million.
Past And Expected Financial Performance
Over the past three years, DDOG’s revenue grew at 58% CAGR. Analysts expect DDOG’s EPS to increase 46.6% in the current quarter, 31.1% in the next quarter, and 34.8% in the current year. Its revenue is expected to rise 19.9% in the current quarter, 15.4% in the next quarter, and 22.8% in the current year.
On the other hand, AKAM’s revenue has increased at a CAGR of 6.4% over the past three years. Its EPS is expected to increase 19% in the current quarter, 12.6% in the next quarter, and 10.2% in the current year. Its revenue is expected to rise 7% in the current quarter, 6.4% in the next quarter, and 4.5% in the current year.
Valuation
AKAM’s forward P/S multiple of 4.26 is lower than DDOG’s 13.68. AKAM’s forward EV/Sales multiple of 4.86x is also lower than DDOG’s 13.05x.
Thus, AKAM is more affordable.
Profitability
AKAM’s trailing-12-month EBIT and EBITDA margins of 18.59% and 29.59% are higher than DDOG’s negative 6.48% and 4.73%. In addition, AKAM’s trailing-12-month net income margin of 13.07% is higher than DDOG’s negative 4.38%.
Thus, AKAM is more profitable.
POWR Ratings
DDOG has an overall rating of C, translating to a Neutral in our proprietary POWR Ratings system. Conversely, AKAM has an overall rating of B, which equates to a Buy. The POWR Ratings are calculated considering 118 different factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. While AKAM has a C grade for Stability, which is in sync with its 24-month beta of 1.00, DDOG has a D grade for Stability, which is justified by its 24-month beta of 1.94.
Among the 45 stocks in the Software - Business industry, DDOG is ranked #30, while AKAM is ranked #9.
Beyond what we’ve stated above, we have also rated both stocks for Growth, Momentum, Value, Sentiment, and Quality. Click here to view DDOG ratings. Get all AKAM ratings here.
The Winner
The software industry is experiencing significant growth, largely propelled by the rapid advancements in technologies such as blockchain, artificial intelligence, cloud computing, and machine learning. These innovations are opening up fresh opportunities for software creation and utilization, fuelling the emergence of state-of-the-art solutions and applications.
Industry players such as AKAM and DDOG are well-positioned to benefit from these industry tailwinds. However, DDOG's poor profitability and elevated valuation multiples make its competitor, AKAM the better buy.
Our research shows that the odds of success increase when one invests in stocks with an Overall Rating of Strong Buy or Buy. View all the top-rated stocks in the Software - Business here.
What To Do Next?
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these “death trap” stocks are lurking in your portfolio:
AKAM shares were trading at $107.27 per share on Wednesday morning, up $1.02 (+0.96%). Year-to-date, AKAM has gained 27.25%, versus a 12.55% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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