It’s no secret that tech stocks have had a tough few months. the Nasdaq Compound is down more than 25% from its all-time high, easily breaching the “bear market” threshold.
Although this raises a lot of fears about the future, long-term investors should be strategic in the face of this weakness. Because so many stocks are being sold aggressively, it opens up opportunities to get into top names at a much lower price. Two of these actions are Shopify (STORE 2.32%) and Datadog (DDOG -1.44%). Both recently reported strong quarters and are down more than 80% and 50%, respectively, from their all-time highs.
Could now be a once-in-a-lifetime buying opportunity?
Due to its extensive e-commerce toolkit, many businesses have flocked to Shopify to establish an online presence during the pandemic. Now that the rush is over, Shopify sees a tougher environment. Its subscription solutions segment grew only 8% year-over-year as fewer merchants joined the platform. However, merchant solutions still grew by 29% as people continue to move their spending online.
Because merchant solutions are a bigger part of Shopify’s business, total revenue grew 22% in the first quarter. Management expects more robust growth in the second half of the year as its previous best quarters were in the first half of 2021. With these problematic comparisons behind it, Shopify’s growth numbers should improve by the end of the year. end of this year.
However, its base numbers are likely to remain negative. Shopify’s operating expenses rose 67% year over year, pushing its bottom line into the red. In addition to some investment losses (which are just losses on paper, as they haven’t been realized yet), Shopify’s loss per diluted share was $11.70 versus profit of $9.94. one year ago. These numbers can be misleading, as management fully expected them.
In its outlook, management said it would “reinvest all of our gross profit dollars back into the business to pursue our multiple avenues of growth.” This is great news for long-term investors, as it reiterates Shopify’s commitment to being one of the best e-commerce solutions available.
With a terrific long-term growth trajectory and a low five-year price-to-sell valuation of 8.3, Shopify is one of the best stocks to buy in this tech bear market.
2. Data dog
While many SaaS (software as a service) stocks are seeing slower growth, Datadog is not. The company’s software enables customers to understand how its programs work individually and together. This technology can fix issues before they are noticed by users and generate unique metrics related to many technology stacks.
Datadog’s offering is unique because almost any business can benefit from its platform, while some SaaS companies only have niche use cases. This widespread use helped Datadog increase revenue by 83% to $363 million in the first quarter and guide growth of 62% for the current period. Datadog was also profitable with GAAP net earnings of $0.03 per share.
But the company is not yet optimized for earnings, so free cash flow is a better metric to gauge its results. During the quarter, Datadog generated $130 million in free cash flow for a 36% margin. This means that the company has converted 36% of its income into cash that the company can use in the future.
With solid revenue growth and profitability, Datadog is one of the highest quality software companies available today. His assessment also reflects this fact.
With 27 times sales and 98 times free cash flow, Datadog is far from cheap. Any trade hiccups or failure to project will cause this stock to fall even further. However, I don’t think that’s likely because Datadog’s solution has a lot more customers to capture.
As of March 31, Datadog had just 2,250 customers with annual recurring revenue of $100,000 or more, up 60% from a year ago. The company should have no problem finding more companies that it can sign up for its product, as well as enticing some of its other customers to spend more.
Datadog is a solid long-term pick, but could experience continued volatility due to its high valuation. However, its bright prospects far outweigh any potential downsides; investors should not overlook the company for this reason.
With the market in disarray, long-term investors can go bargain hunting and pick up some of the best names on the cheap. While it can be nerve-wracking to buy when the market is down, it has generally proven to be wise when investors have a holding period of at least five years.