Better Cloud AI Stock: Oracle vs. Datadog

Oracle (NYSE: ORCL) and Datadog (NASDAQ: DDOG) represent two ways to invest in the secular growth of the cloud and artificial intelligence (AI) markets. Oracle provides cloud-based database services, enterprise software, and generative AI services across its own cloud infrastructure platform. Datadog's platform collects diagnostic data from a company's servers, databases, and software in real time, and it aggregates all of that information onto unified dashboards for IT professionals. Bits AI, its new generative AI-powered chatbot, can also be used to diagnose potential problems.

Oracle's stock rallied more than 30% this year, but Datadog's stock stayed nearly flat. Let's see why the blue-chip tech stock outperformed its higher-growth peer by such a wide margin -- and if that trend will continue for the foreseeable future.

Three IT professionals work together in a data center.

Oracle's new AI deals are impressing the bulls

Oracle's revenue increased 6% in fiscal 2024 (ended on May 31), driven by its 12% growth in cloud services and license support revenues, which accounted for 74% of its top line. That expansion -- largely driven by the market's robust demand for its enterprise resource planning services and cloud infrastructure services -- offset the slower growth of its on-premise software. Its adjusted earnings per share (EPS) rose 9%.

Those numbers were decent, but Oracle's cloud services growth cooled off throughout the year as the macro headwinds drove many companies to rein in their software spending. However, analysts expect Oracle's revenue and adjusted EPS to increase 9% and 12%, respectively, in fiscal 2025 as the macro environment improves, it locks in more cloud customers, and it laps the initial costs of integrating Cerner, the healthcare IT services giant it acquired for $28 billion in June 2022.

During Oracle's fourth-quarter report on June 11, it announced that OpenAI would run more of its deep learning and AI workloads on its cloud infrastructure platform. Oracle also signed a new deal to run its cloud-based database services on Alphabet's Google Cloud. That deal, which follows a similar partnership with Microsoft's Azure, will help it expand the reach of its database services beyond its own cloud platform.

Those announcements indicate that Oracle is still a strong contender in the cloud and AI race, even though its Oracle Cloud Infrastructure platform controls a much smaller slice of the cloud infrastructure market than Amazon Web Services, Azure, and Google Cloud. They also indicate that Oracle -- like Microsoft -- is successfully transforming itself from an aging enterprise software giant into a higher-growth cloud company. The stock still looks reasonably valued at 20 times forward earnings after its latest post-earnings pop, and it pays a forward yield of 1.1%.

Datadog faces a tougher slowdown

Datadog dazzled investors with its hypergrowth rates when it went public in 2019. Its annual revenue increased at a compound annual growth rate of 67% from 2019 to 2022, while its number of large customers -- those generating at least $100,000 in annual recurring revenue -- more than tripled.

But in 2023, Datadog's revenue only rose 27% as its number of large customers grew 15%. It expects its revenue to rise 22%-23% in 2024. Analysts also anticipate 23% revenue growth this year, but they expect its adjusted EPS to dip 4%.

Datadog mainly attributes that slowdown to macro headwinds, but it also faces stiff competition from similar observability services like Cisco Systems' AppDynamics and Splunk, Dynatrace, New Relic, LogicMonitor, Microsoft's Azure Monitor, and IBM's Instana. Datadog's total addressable market is also maturing: According to Markets and Markets, the global observability tools and platform market can only grow at a CAGR of 11.7% from 2023 to 2028. That slowdown could drive Datadog to make more acquisitions to boost its sales and expand its ecosystem.

On the bright side, Datadog still kept its net revenue retention rate (which gauges its year-over-year sales growth per existing customer) comfortably above 100% over the past 12 months. Its recent rollout of the BitsAI chatbot -- as well as its new observability tools for Google Cloud's Vertex AI apps and Nvidia's data center GPUs -- could also lock in more customers and strengthen its competitive defenses as the generative AI market expands.

Datadog is still growing, but its stock isn't cheap at 71 times forward earnings. That premium valuation could limit its upside potential as long as interest rates stay elevated, but Datadog might be a compelling takeover target for a bigger tech company.

The better buy: Oracle

It's easy to see why Oracle outperformed Datadog this year, and why it should stay in the lead for at least the next few quarters. Oracle generates more consistent revenue and earnings growth, it has a larger and more broadly diversified cloud and AI ecosystem, its stock is cheaper, and it pays a decent dividend. Datadog is a well-run company, but its moat simply isn't wide enough and its stock still seems a bit too expensive relative to its near-term growth potential.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. 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. The Motley Fool has positions in and recommends Alphabet, Amazon, Cisco Systems, Datadog, Dynatrace, Microsoft, Nvidia, and Oracle. 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.