SolarWinds or Datadog: Which Tech Stock Has Higher Upside Potential?

Among other things, 2020 saw ransomware and malware attacks spike amid accelerated digitization triggered by the pandemic. SolarWinds has been in the news over the past few days due to a cyberattack that exploited a vulnerability in the company’s Orion products.

The network management software specialist’s Orion platform was compromised by a malware. As a result, several US government agencies and companies using SolarWinds’ Orion products became victims of the cyberattack allegedly by Russian hackers (though the company stated that it has not independently verified the identity of the attacker).

So, where does SolarWinds stand now and what do analysts think about the impact of this malicious attack on the company’s prospects? We will discuss SolarWinds and use the TipRanks Stock Comparison tool to compare it with Datadog to choose the stock that offers a better investment opportunity.

SolarWinds (SWI)

SolarWinds is a leading IT infrastructure management software provider that boasts over 320,000 customers. The company’s Orion monitoring and management software, which the hackers attacked recently, is a key growth driver and accounted for about 45% of the overall revenue in the first nine months of 2020.

Last week, SolarWinds announced that it has released updates in response to the malware, now called Supernova, for all supported versions of Orion platform products and a fix for customers on unsupported versions of these products.

The company has not yet provided any details on the financial impact of the cyberattack. This brings a lot of uncertainty into the picture, according to Truist Financial analyst Terry Tillman, who downgraded SolarWinds to Hold from Buy last week and lowered the price target to $14 from $26. The analyst cited the cyberattack and the inability to properly measure the impact as the reasons for the downgrade.

Tillman stated, “We lack visibility into potential business and financial model impact.” (See SWI stock analysis on TipRanks)

Likewise, Robert W. Baird analyst Robert Oliver downgraded SolarWinds to Hold from Buy and brought down his price target to $15 from $24. The 5-star analyst feels that the recent cyberattack may create “prolonged uncertainty,” which could continue to pressure shares even after the recent pullback.

Oliver feels that the breach could impact SolarWinds’ growth expectations due to potential damage to its brand. Prior to the current malware chaos, the company predicted revenue growth of 8%-9% on a non-GAAP basis for 2020.

Oliver also pointed out the “unfortunate timing” of the CEO transition, which he says brings an “unknown” to investors at a critical time.

Ahead of the cyberattack news, SolarWinds announced the appointment of Sudhakar Ramakrishna as the company’s new President and CEO and a member of the Board of Directors, effective Jan. 4, 2021. Ramakrishna will succeed Kevin B. Thompson, who has been SolarWinds’ CEO since March 2010.

Currently, the Street is cautiously optimistic about SolarWinds, with 3 Buys, 3 Holds and 1 Sell adding up to a Moderate Buy analyst consensus. Owing to the recent sell-off, shares are down 19.2% year-to-date. The average price target of $20.86 indicates upside potential of 39.1% from current levels.

Datadog (DDOG)

Datadog, which went public last year, is a cloud-native monitoring and security platform. Last month, the company posted better-than-anticipated 3Q results and ended the quarter with 13,100 customers. That’s a 38% jump from the prior-year quarter. Furthermore, the number of customers with annual run rate revenue, or ARR, of at least $100,000 grew 52% to 1,107.

The company’s revenue increased 61% year-over-year to $154.7 million and helped it generate adjusted EPS of $0.05 compared to break-even earnings in the prior-year quarter. Datadog is gaining from pandemic-induced rapid digital transformation and cloud migration. (See DDOG stock analysis on TipRanks)

To expand its reach, Datadog recently announced a strategic partnership with Microsoft, under which Datadog tools will be available to Microsoft Azure customers as “a first class service.” Last month, it announced the extension of its partnership with Google Cloud. Under the extended deal, Datadog will have an additional presence in Google Cloud regions and there will be deeper sales alignment between the two entities. The company also has an alliance with leading cloud vendor AWS or Amazon Web Services.     

Rosenblatt Securities analyst Blair Abernethy recently initiated a Hold rating on Datadog with a $97 price target. Abernathy draws attention to the fact that the company is pursuing an attractive and growing total addressable market of over $35 billion.

He pointed out that enterprise IT is moving more workloads to the cloud and at the same time, merging DevSecOps teams are driving more frequent enterprise software releases. Both factors are expected to drive demand for monitoring software capabilities. “Datadog targets new cloud migrations and these merging IT teams across any size business with its low-cost product entry point,” stated Abernethy.

He also noted that Datadog has been expanding into the government vertical, further increasing its addressable market. Plus, the analyst believes that the company’s rapid innovation will help drive upsell opportunity.

However, despite these favorable trends, Abernethy remains on the sidelines as he feels that much of his positive outlook is already priced into the stock and the valuation (in terms of Enterprise Value/Sales) is at the high end of comparable high growth enterprise software vendors. The analyst awaits a “more attractive entry point.”

The rest of the Street has a Moderate Buy analyst consensus for Datadog, based on 5 Buys versus 10 Holds. With shares rising 162.1% year-to-date, the average price target of $106.45 implies an upside potential of 7.6% in the months ahead.  

Bottom line

Datadog’s growth prospects look promising in the current scenario but certain analysts are concerned about its valuation. Owing to the recent pullback, the Street’s average price target indicates a higher upside potential in SolarWinds stock than DataDog. That said, investors need to be cautious with regard to the uncertainty surrounding SolarWinds and keep an eye on any further updates that could impact the stock.

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Disclaimer: The opinions expressed in this article are solely those of the featured analysts. The content is intended to be used for informational purposes only. It is very important to do your own analysis before making any investment