Market volatility is high right now, and the stocks of several great companies have been caught up in the big price swings, creating bargain opportunities for savvy investors. Prices for some stocks are falling 30% to 50%, even though the long-term prospects of the companies haven't changed at all.
Let's take a closer look at two potential all-star companies that have been caught up in the broader sell-off. These are stocks that investors can purchase at a discount for even bigger long-term gains.
Image source: Getty Images.
1. Datadog
Datadog (DDOG -0.65%) provides monitoring and security software for cloud applications. It combines analytics and cybersecurity functions, and Datadog customers are able to use their own technology more efficiently. On its surface, that's a great start. Assuming that this company has a strong suite of products, they can be really valuable for businesses. It's also a high-growth industry, so there's potential for fundamental improvement.
All the evidence indicates that Datadog is a strong candidate to take advantage of the opportunity. It's ranked highly in Gartner's latest Magic Quadrant for Application Performance Monitoring report, falling into its leadership quadrant. The ranking suggests high product quality.
Datadog's customers are voting with their wallets, too. The company is expanding its relationships with existing customers, and it's performing well among larger clients. Its net retention rate is above 130%, which is strong evidence of customer satisfaction. It's also attracting new customers, which drove 84% revenue growth in its most recent quarter. Those are all bullish signals.
That customer satisfaction and growth contribute to Datadog's expanding economic moat. More than 18,000 companies subscribe to the company's services, and that scale creates a massive advantage over potential competitors that might enter the market in the coming years. Meanwhile, the company is adding new capabilities to an already well-regarded product suite. As it becomes deeply rooted in the day-to-day functions of its customers, it increases switching costs and builds an important barrier against the competition. Wide economic moats are essential for long-term staying power and cash flow stability.
The stock price is still somewhat expensive despite falling about 23.6% from its 2021 all-time high. Its price-to-sales (P/S) ratio is 45, and the forward price-to-earnings (P/E) ratio is around 294. Quality growth stocks with great prospects usually are expensive.
Obviously, that creates risks for investors. If Datadog falters or runs into unforeseen obstacles over the next five years, then investors can expect further volatility. They should also expect to pay a premium to buy tomorrow's all-stars. Datadog might be expensive but can still deliver huge returns if it continues along its business path.
2. CrowdStrike
CrowdStrike Holdings (CRWD -0.86%) is a cybersecurity stock that's focused on endpoint protection. Its products prevent employees' devices from falling victim to hacks and malware, which in turn helps secure the network in general.
Cybersecurity has received a lot of attention in recent years. Software and connectivity are touching nearly every aspect of business activity and personal lives. That creates more opportunities for criminals to access valuable data, as we saw with multiple high-profile cyberattacks in recent years. That's encouraging news for companies that offer threat protection, and attention on the topic should ensure that the top cybersecurity stocks enjoy sustained momentum when market conditions allow.
CrowdStrike is considered the leader in endpoint security. It receives stellar marks from Gartner in its Magic Quadrant for Endpoint Protection Platforms report, which places it on the same footing as heavy hitters like Microsoft. Other credible industry publications echo this rating. CrowdStrike rode that quality to a 12% market share, making it the largest vendor in its particular cybersecurity niche.
CrowdStrike reported 125% net revenue retention for its full fiscal year 2021, up from 124% the prior year. It's most recent report, a corporate overview in August, showed a net retention rate of 124.8%.
CrowdStrike added more than 1,600 new subscription customers in Q3 of Fiscal 2022 (ending Oct. 31), a 75% year-over-year increase that brings the total to nearly 15,000. That fueled 63% revenue growth and 67% subscription growth. This expansion is being accomplished with a stable gross margin above 75%, and the business produced more than $123 million in free cash flow in its most recent quarter. That's all great evidence of relative stability in a highly competitive environment.
CrowdStrike is a technology leader in a growth industry, it's growing rapidly, and it's building a wide economic moat. The stock isn't cheap by any means, with a P/S of 28.3 and forward P/E of 182. But the stock is down nearly 41% from its all-time high. It might slide further in the next few months, but we're still looking at a more reasonable entry point today for potential long-term upside.
Ryan Downie owns Microsoft. The Motley Fool owns and recommends CrowdStrike Holdings, Inc., Datadog, and Microsoft. The Motley Fool recommends Gartner. The Motley Fool has a disclosure policy.
