Smart investors are always looking for stocks to buy that can be held for the very long term. This is important because the holding period matters. The stock market goes up more years than it goes down, meaning the longer a stock is held, the better its chances of benefiting from the overall market's movements.
However, only some stocks go up over time, which is why investing in the right companies also matters. Finding businesses with competitive advantages that are gaining momentum in fast-growing industries is a step in the right direction. Here are two stocks in the tech sector that have what it takes to be winning investments over the long term.
1. DigitalOcean
Small and medium-sized businesses need cloud infrastructure support but don't always have the expertise or even the headcount to dedicate time to this important task. DigitalOcean (DOCN 1.89%) specializes in making cloud computing simple and affordable with a robust support system so its customers can spend time building their business and less time worrying about cloud computing.
For most of its time as a public company, DigitalOcean appeared to be in hyper-growth mode, featuring impressive revenue and customer growth while remaining unprofitable. In 2023, that dynamic shifted. Like many tech companies, DigitalOcean experienced a slowdown in revenue growth. Unlike many tech companies, DigitalOcean was able to flip to profitability even as its revenue growth was slowing.
DigitalOcean is also growing its largest customers the fastest. Customers it calls Scalers, which are those spending more than $500 per month, grew by 13% year over year in Q4 of 2023. This outpaced overall customer growth of 5%. This is important because Scalers account for more than half of the monthly revenue for the company.
2. DataDog
Cloud-based analytics platform DataDog (DDOG -1.29%) is a software-as-a-service (SaaS) company that helps businesses see all their back-end tech information in one place so it can be monitored more easily. Based on the Q4 2023 results, it appears that DataDog's platform continues to gain momentum and prove its value to its customers.
Revenue growth has been a hallmark of DataDog ever since its debut on the public markets, and the good times are expected to continue. The company posted year-over-year revenue growth of 27% in 2023, which is expected to increase by another 20% in 2024. This is being driven by consistent customer growth that increased by 18% in 2023. Much like DigitalOcean, DataDog is growing its number of larger customers at a higher rate than its overall customer count. Customers with $1 million or more in annual recurring revenue (ARR) grew by 25% in 2023, and those with ARR of $100,000 or more grew by 15%.
It's always better when a company grows its largest customers at a faster pace because those customers contribute much more to overall financial results. For example, DataDog's customers with $100,000 or more in ARR represent 86% of overall ARR.
This large customer growth is also helped along by existing customers spending more over time. In Q4 of 2023, 83% of customers used at least two products, up from 81% the year prior. There was also an increase over Q4 of 2022 for customers using four, six, and eight or more products. Combine that with a dollar-based net retention rate around 115% and it's clear that DataDog's customers are happy and willing to spend more over time. These results are important because getting existing customers to increase spending is more cost-efficient than acquiring new customers.
The bottom line for investors
The fact that DigitalOcean has been able to grow while competing against the cloud computing offerings of some of the largest companies in the world demonstrates that there's a market for catering to smaller businesses that Amazon, Microsoft, and Alphabet have yet to capture. And DataDog has been successful in a market that continues to grow as businesses continue to rely on technology systems that need to be secured and monitored.
Both of these companies are well-positioned for future success and have track records to build upon, making them prime candidates to buy and hold for the long term.
Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Jeff Santoro has positions in Amazon, Datadog, DigitalOcean, and Microsoft. The Motley Fool has positions in and recommends Alphabet, Amazon, Datadog, DigitalOcean, and Microsoft. The Motley Fool recommends the following options: long January 2026 $395 calls on Microsoft and short January 2026 $405 calls on Microsoft. The Motley Fool has a disclosure policy.
