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Motley Fool Issues Rare “All In” Buy Alert
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It hasn’t been a fun year for investors, but as the great value investor Benjamin Graham once said, “In the short run, the market is a voting machine, but in the long run, it is a weighing machine.”
That’s another way of saying beaten-down growth stocks are ripe for the pickings. Two promising industries that are still reporting strong growth in 2022 are cloud services and cybersecurity. Given the explosive growth happening in these markets, here’s why I would put my money on Datadog (DDOG 0.02%) and Crowdstrike Holdings (CRWD 0.33%) for the long term. Let’s find out a bit more about these two hypergrowth stocks.
Datadog has been consistently growing revenue above 50% since its initial public offering in late 2019. The company is a leader in the application performance monitoring and observability market — a market estimated to be worth $38 billion in 2021 and expected to grow much larger over time.
Datadog’s platform is used by companies of all sizes to gauge cloud infrastructure performance and identify problems that need troubleshooting. It also offers security monitoring tools, where it is seeing rapid growth.
These are essential tools for every company needs that is migrating data systems over to the cloud, and that’s why Datadog continues to see robust demand for its platform. In the first quarter, Datadog signed a seven-figure deal with a European car manufacturer, a six-figure deal with a major U.S. hotel company, and another six-figure upsell with a global shipping company.
Datadog helps these companies save time, run their business more efficiently, and move forward with their migration to the cloud. Revenue has accelerated from a year-over-year growth rate of 51% in the first quarter of 2021 to 83% in the first quarter of 2022.
There are not many companies reporting such strong numbers in this economic environment, which speaks volumes about the value embedded in software-as-a-service companies. Companies migrating over to the cloud are making a long-term investment, so it doesn’t matter how the economy performs now; these companies must invest in mission-critical areas like cloud migration and security to stay competitive.
Like many software-as-a-service stocks, Datadog stock is not cheap, trading at a price-to-free cash flow ratio of 99. But at the rate the business is growing, and with a massive addressable market ahead, this growth stock has already earned a spot among my personal holdings.
Cybersecurity is another mission-critical area that continues to see strong demand. Crowdstrike was founded in 2011 and has been growing incredibly fast. Revenue grew four-fold over the last five years, with annual recurring revenue reaching $1.9 billion over the last four quarters. Crowdstrike can still grow enormously with an expanding addressable market estimated to be worth $71 billion by 2024.
Crowdstrike has built its Falcon security platform around an expansive amount of data, which management sees as the company’s competitive advantage. It uses artificial intelligence to gather and analyze trillions of incidents in real time to detect vulnerabilities and prevent threats for clients.
The proof is in the pudding. Crowdstrike added 1,620 net new subscription customers in the most recent quarter, bringing the total to 17,945 at the end of April. That’s a year-over-year growth rate of 57%.
What’s most telling about Crowdstrike’s competitive position against other cybersecurity options available is that 71% of subscription customers have adopted at least four additional services, or modules. These add-on modules cover security for IT operations, log management, identity protection, and many other areas of corporate security. Falcon Complete, which provides a team of digital forensic experts to assist companies against potential threats, just completed its best quarter yet with annual recurring revenue reaching an all-time high.
Cybersecurity is essential. There’s a never-ending threat that requires ongoing investment. Although there are several competitors in the market, more companies are placing their trust in Crowdstrike. CEO George Kurtz mentioned on a recent earnings call that the demand environment is more robust today than this time last year. If cybersecurity is a top priority for corporations, buying shares of Crowdstrike should also be a top priority for investors.
John Ballard has positions in Datadog. The Motley Fool has positions in and recommends CrowdStrike Holdings, Inc. and Datadog. The Motley Fool has a disclosure policy.
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