Selling the market: two growth stocks fell more than 40% to buy fist
2022 seems to be a huge challenge for the US stock market. Higher inflation is expected to cause the Federal Reserve to continue raising benchmark interest rates which could further stifle economic growth in the near term. It is not surprising that both Standard & Poor’s 500 and the Nasdaq Composite They are down 17% and 24%, respectively, since the beginning of the year.
While bear markets can be painful for many investors, they provide a window of opportunity for deal-seeking investors who are looking for an essentially solid business. Business spending in areas such as networking, security and monitoring will be less affected during a recession, considering that these services are critical to business. Hence, companies like Cloud Flare (Clear -7.47%) And the datadog (dog -7.35%) It should continue to grow even under difficult market conditions.
Here’s why these companies are proving to be attractive investment opportunities in July 2022.
Shares of the leading cloud-based Content Delivery Network (CDN) and distributed denial-of-service (DDoS) cybersecurity operator Cloud Flare (Clear -7.47%) By more than 56% so far this year. Investors are concerned about stocks with free and negative cash flow in tough economic times. Also, the company has yet to turn a profit, mainly due to its large stock-based compensation expense among other general and administrative expenses. Despite these challenges, the extent of the stock price correction seems unjustified.
Cloudflare’s native edge-based network (data computation is done in the local data centers closest to the end users rather than the central location) spans 270 cities in more than 100 countries around the world. The company provides its customers with highly efficient, scalable, cheap and secure software-based network solutions, helping to improve the performance, reliability, and security of their critical business applications and software infrastructure. The company also offers tools for developers to build and run custom, programmable apps on the Cloudflare platform.
Cloudflare has successfully implemented a “freemium” pricing model. Here, basic networking and security services are offered free to customers, and customers must opt for paid plans to access advanced features. The strategy appears to be working well, considering that the number of the company’s paying customers increased annually at a compound average growth rate (CAGR) of 28% from 73,555 in Q1 2019 to 154,109 in Q1 2019. 2022 (Expired March 31, 2022). The company’s large clients (paying more than $100,000 in annual revenue) annually grew at a much faster pace with a compound annual growth rate of 66% from 336 to 1,537 in the same frame.
Cloudflare reported a dollar-based net retention rate (DBNRR) of 127% in the first quarter. This means that fee-paying customers as of Q1 2021 spent 27% more on Cloudflare solutions in Q1 2022, including the impact of customer disruption. As customers choose more Cloudflare products, it is becoming more and more difficult for them to switch to the competition. The company’s overall retention rate of over 90% highlights the stability of its customer base.
Cloudflare is currently targeting a total addressable market of $115 billion and is expected to be worth $135 billion by 2024. Against this background, with the company generating only $656 million in revenue in 2021, there is still significant potential for growth. future in the future. quarters.
Shares of leading app performance monitoring and observation company Datadog are down 40% so far this year. This drop can be mainly attributed to broader market pullbacks. However, the basic story of the company is sound.
Datadog has managed to increase its revenue year-over-year by over 65% since 2017. The company targets a market estimated at $42 billion in 2022 and is expected to grow to $53 billion by 2025.
Datadog’s customer count grew year on year by 30.3% to 19,800 at the end of the first quarter (ended March 31, 2022). Currently, 81% of customers use more than two products, and 35% use more than four products. The company has recorded an impressive rise in the number of large enterprise clients (who pay over $100,000 in annual recurring revenue and $1 million). Additionally, existing customers have consistently been spending more on Datadog solutions in subsequent years, as evidenced by a DBNRR of over 130% for the past 19 consecutive quarters. The company’s overall dollar-based revenue retention rate of over 95% also highlights the low customer rate. A stable customer base that includes many large customers along with an effective selling strategy can enable Datadog to withstand the stress of a recession.
Datadog is not a profitable company yet. However, the company already has a positive cash flow. The company is currently trading at forward sales of 13.2x, the lowest level since January 2021. Given all these positives, this growth stock looks like a smart long-term investment.
Manali Bahadi does not have any position in any of the mentioned shares. Motley Fool has positions at Cloudflare, Inc. And Datadog recommends it. Motley Fool has a disclosure policy.