Please ensure Javascript is enabled for purposes of website accessibility

2 Stocks to Watch in May

By Herve Blandin - May 6, 2020 at 9:15AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Two high-growth cloud companies at lofty valuations will update their outlook this month amidst the coronavirus pandemic.

Okta's (OKTA -3.03%) and Datadog's (DDOG -2.53%) offerings should profit from the sudden increase in demand for cloud solutions as many employees are required to work from home to try to limit the spread of COVID-19. 

Both cloud specialists will release their next-quarter earnings this month, and their respective management will most likely discuss the effects of the coronavirus on their outlook. Thus, investors will soon have the opportunity to verify whether these companies' forecasts still justify their lofty valuations.

Okta: Cloud-based identity management

With the development of cloud computing, many employees access a growing number of applications hosted in several clouds to perform their tasks. That means these users need a different login and password for each application, which can become a burden... until Okta intervenes.

The company's workforce identity solution allows users to access their cloud applications in a secure way with only one account. Okta also offers a solution for enterprises to manage the identities of their customers.

Given the tailwinds cloud computing and cybersecurity represent, Okta has been growing its revenue at a fast clip. During its last fiscal quarter that ended in January, revenue grew 45% year over year to $167.3 million. And during the last earnings call on March 6, management increased its forecasted full-year revenue in the range of $770 million to $780 million, a 31% to 33% year-over-year growth, as it had indicated the coronavirus had not affected the company's businesses.

However, given Okta's high sales and marketing expenses (58% of revenue during the last 12 months), profits seem far away. Last year, non-GAAP (adjusted) operating losses amounted to $48.5 million. Management also forecasted non-GAAP operating losses to increase to a range of $57 million to $65 million this year. And you should keep in mind these non-GAAP results exclude important operating costs -- such as share-based compensation -- that reached $137.3 million last year.

With $465 million of cash, cash equivalents, and short-term investments net of debt at the end of last quarter, the company can sustain these losses for a few years. But its lofty enterprise value-to-sales ratio around 23.6, based on the midpoint of revenue guidance, indicates that the market expects strong growth and improving margins over the long term. 

Thus, during the next earnings call on May 28, investors should pay close attention to management's comments on the effect of the coronavirus on the company's growth rate and expenses.

Man in suit looking at cloud with lock symbol on it with magnifying glass

Image source: Getty Images.

Datadog: cloud monitoring

Datadog proposes several products that monitor the health and the performance of cloud infrastructures and applications. 

The company has been increasing its revenue over the last several years thanks to the secular growth of cloud computing, but it has also been taking advantage of the cross-selling opportunities its different products represent.

For instance, over the last 10 consecutive quarters, existing customers spent at least 30% more than the prior year to consume Datadog's products. And during the last quarter, 25% of customers adopted all three of Datadog's core solutions, up from 5% one year ago. These cross-selling opportunities will increase, since the company has recently released its new security monitoring offering.

As a result, Datadog's growth has been spectacular. During the last quarter, revenue increased to $113.6 million, up 84% year over year. And during the last earnings call on Feb. 14, management forecasted full-year revenue to increase by 49%, based on the midpoint of its guidance range of $535 million to $545 million.

As Datadog's sales and marketing expenses represented only 40% of revenue, it posted a small non-GAAP operating loss of $5.4 million last year, and management expects a still-modest non-GAAP operating loss in the range of $20 million to $30 million this year. And in contrast with Okta, Datadog's operating costs excluded from non-GAAP operating losses remain modest -- $14.8 million last year.

Datadog can also rely on its large cash balance of $778 million (including cash equivalents, restricted cash, and marketable securities) at the end of last year, without debt, to sustain losses over many years. 

Accordingly, the market values Datadog as a high-growth stock with an elevated enterprise value-to-sales ratio of 23.6, based on the midpoint of the company's full-year revenue guidance range.

However, management communicated its outlook on Feb. 14, long before the World Health Organization (WHO) declared COVID-19 a pandemic on March 11. Thus, investors should focus on revenue growth guidance during Datadog's next earnings call on May 11 to make sure the company's demanding valuation still corresponds to its expected spectacular revenue growth.

Herve Blandin has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Datadog and Okta. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Okta Stock Quote
$102.49 (-3.03%) $-3.20
Datadog, Inc. Stock Quote
Datadog, Inc.
$114.78 (-2.53%) $-2.98

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/12/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.