Investors looking to invest in the tech sector have hundreds of companies to choose from. While there are many niche players in the space with "nice-to-have" offerings, investors should be focused on stocks where the use cases affirm the company is vital to its customers.
Three stocks that fit that description are Datadog (DDOG -1.43%), Snowflake (SNOW -1.61%), and The Trade Desk (TTD -0.54%). Each stock is also trading well off its all-time highs, giving investors an opportunity to own these dominant companies at a discounted price.
Let's find out a bit more about these three tech stocks you should consider buying right now.
Image source: Getty Images.
1. Datadog
With companies utilizing more cloud solutions than ever before, it has become harder for the companies' tech support staff to monitor how each one is functioning. Datadog allows information technology (IT) teams and developers to more easily monitor information flows and app performance to make sure everything is running smoothly. Additionally, Datadog utilizes artificial intelligence (AI) to automate many of these processes, further reducing a company's dependence on software engineers to troubleshoot issues and freeing them up to do actual developmental work.
The services Datadog offers are seeing rapid adoption, showcased by Datadog's 84% year-over-year quarterly revenue growth to $326 million and a 114% increase in high-level customers who spend at least $1 million annually on Datadog services. For the full year, revenue grew 70% to $1.03 billion, but what should excite investors for 2022 is Datadog's accelerating revenue growth that has been demonstrated for multiple quarters in a row.
| Q1 2021 | Q2 2021 | Q3 2021 | Q4 2021 | |
|---|---|---|---|---|
| Revenue growth (YOY) | 51% | 67% | 75% | 84% |
Data source: Datadog. YOY = year over year.
Business sped up during 2021 and management will look to capitalize on the success during 2022. Management gave a first-quarter 2022 outlook of 70% revenue growth at the midpoint, which is still much faster than it was growing at the same period during 2021.
Another positive point for Datadog is its 24% full-year free cash flow margin. With positive cash flow, Datadog can add to its already large $1.6 billion cash stockpile each quarter, allowing it to capture market share and purchase other businesses as it sees fit. With 18,800 customers, Datadog has a long way to go before fully penetrating the available market.
2. Snowflake
Raw data can contain powerful information businesses can utilize to make decisions. However, storing and processing it can be difficult without huge dedicated software engineering teams -- something many businesses don't have the financial resources to develop. Snowflake solves this issue by offering companies access to its data storage and processing applications. With Snowflake, businesses can create pipelines to feed other programs from nearly any data source -- even unstructured data.
Snowflake is growing even faster than Datadog, with third-quarter (ending Oct. 31) year-over-year revenue growth of 110% to $313 million. A key metric for Snowflake is its net revenue retention rate, which was 173% for the quarter, meaning customers spent $1.73 this quarter for every $1 they spent during the same time frame last year.
Additionally, Snowflake is seeing rapid growth outside of the U.S. with year-over-year quarterly revenue in the Europe, the Middle East, and Africa region and the Asia-Pacific and Japan region up 174% and 219%, respectively.
With only 5,416 customers utilizing Snowflake and a mere 148 spending more than $1 million annually, Snowflake has plenty of room to expand its reach.
3. The Trade Desk
Websites, podcasts, and connected TV can sell advertising space to companies with The Trade Desk acting as a demand-side broker. The businesses buying the space often generate fantastic returns on advertisement spending because The Trade Desk can provide detailed information about the ad viewers. With The Trade Desk's platform, businesses can set a budget, target an audience, and analyze how their ad spending affects product sales.
While not generating nearly as explosive growth as Snowflake or Datadog, The Trade Desk's fourth-quarter revenue grew year over year at a healthy 24% while full-year revenue growth was 43%. The Trade Desk had a tough Q4 comparison with the huge 2020 U.S. political ad campaign spend. After subtracting this once-every-four-years revenue boost, The Trade Desk improved its Q4 revenue growth rate to 36%. Management also gave positive Q1 guidance, projecting quarterly sales to rise 38% year over year.
With huge partnerships with companies like Walmart and Walgreens Boots Alliance taking full effect during 2022, The Trade Desk is showing its usefulness and I'd expect more partnerships to form throughout the year.
Relative valuation
Because of strong execution and a huge market opportunity, all three stocks have high valuations from a price-to-sales standpoint.
DDOG PS Ratio data by YCharts
When buying the best of the best, investors must be prepared to pay a high price as best-in-class doesn't come cheap. On the flip side, if any of these companies slips up with a bad quarterly earnings report, the stock could experience a volatile price drop.
However, I believe the upside far outweighs the downside for each of these businesses. Technology stacks (Datadog), data streams (Snowflake), and advertising (The Trade Desk) aren't going away and, in many cases, the solutions are just getting started. With each stock down in price at least 20% or more, I believe now is a great opportunity for investors to purchase these businesses on sale. Consider picking them up or adding to an initial position with a minimum three- to five-year holding period.
