While the S&P 500 is flat so far in 2020, the tech-heavy Nasdaq has trounced the returns of the broader market, gaining more than 17%. That isn't an anomaly, either. The Nasdaq has outperformed both the S&P 500 and the Dow Jones Industrial Average over the one-year, three-year, five-year, and 10-year periods. In fact, over the past decade, the Nasdaq has returned a whopping 359%, with the Dow Jones and S&P 500 returning just 153% and 191%, respectively.
This provides a pretty clear indication of why investors should include a number of technology stocks in their portfolios or risk missing out on better-than-average gains. With that in mind, let's look at three tech stocks that are poised for substantial growth over the coming decade.
Datadog: A cloud-computing necessity
One of the consequences of the pandemic has been the accelerated shift to cloud computing. This has made it more critical than ever that companies keep their cloud-based systems up and running, as any critical issues can result in downtime that businesses can ill afford, particularly with the decentralization of IT departments.
That's where Datadog (DDOG 7.42%) comes in. The cloud-native data analytics platform provides a host of services for monitoring servers, databases, tools, and services. It not only notifies companies of problems as they occur, but it also provides useful analytics that can prevent the issue from recurring in the future.
Don't just take my word for it. Datadog was recognized as a visionary in application performance monitoring, according to research company Gartner. Forrester Research came to a similar conclusion, naming it an industry leader in the intelligent application and service monitoring space.
The strong demand for its services is evident in Datadog's first quarter results as revenue grew 87% year over year, accelerating slightly from 85% in the fourth quarter. Even more telling, the company turned profitable for the first time, as it was able to leverage its increasing customer base to boost its bottom line. This also helped drive the stock's triple-digit gains so far this year.
The need to prevent downtime won't end when the pandemic is a distant memory, which will help drive Datadog's growth for years to come.
Zoom: When face-to-face just won't do
More beneficiaries of the transition to remote work are video conferencing services that allow teams to stay in touch without the need for in-person meetings that can lead to transmission of the coronavirus. Zoom Video Communications (ZM 3.91%) was there to heed the call, helping to make it one of the hottest stocks of 2020.
Many investors feared that the number of free accounts wouldn't translate into revenue growth, but nothing could be further from the truth. Zoom produced blockbuster results in its fiscal first quarter (which ended April 30), putting to bed any question about its future growth prospects. Revenue grew 169% year over year, while the customers contributing $100,000 in trailing 12-month revenue climbed 90%. Zoom continues to expand in the enterprise space, as the number of customers with more than 10 employees grew 354%. The company nearly doubled its full-year guidance as the result of its earnings report.
The future looks equally bright for Zoom. There's no end in sight for the pandemic, so many companies will continue to work remotely, at least for the foreseeable future, with robust demand from the company's video conferencing solutions. In addition, in mid-June, Zoom announced that it had earned the coveted U.S. Federal Risk and Authorization Management Program (FedRAMP) authorization, permitting its use by U.S. federal government departments and agencies.
These factors should help Zoom continue its impressive growth far into the future.
Fastly: The name says it all
Filling out our trifecta of high-growth tech stocks is Fastly (FSLY 3.32%). The aptly named company uses a state-of-the-art content delivery network (CDN) to help clients achieve speedier response times and rapid loading of websites, photos, videos, apps, and more. This is accomplished with the help of its strategically placed data centers, which form a lightning-fast edge cloud platform.
With in-person transactions largely at a standstill, a company's digital presence is more important than ever before, and nothing will send potential customers running to a competitor faster than slow digital access or lagging content-delivery speeds. Streaming video, e-commerce, and online gaming providers were already experiencing robust adoption pre-pandemic and have all gotten a boost this year, largely the result of stay-at-home orders. These providers use Fastly to ensure their offerings don't suffer from extensive loading times.
Fastly's first quarter results help highlight the opportunity. Revenue grew 38% year over year, while its non-GAAP losses declined by about 80%. At the same time, its base of enterprise customers grew 22% year over year, while existing customers spent 33% more than the same period last year.
The need for fast, secure, and scalable content delivery isn't going anywhere and will only increase as the complexity of the connections grows. Fastly's platform has already demonstrated the ability to handle hundreds of billions of internet requests a day.
Fastly generated $200 million in revenue last year and estimated its addressable market in the neighborhood of $36 billion. This shows that Fastly has only just begun to tap a large and growing opportunity, giving it plenty of room to run in the months and years ahead.
A word on valuation
In keeping with the opportunity for ridiculous growth, these companies all fall squarely into the high-risk, high-reward category. As with many high-growth young companies, these high-fliers are by no means cheap. Datadog, Zoom, and Fastly are selling at 46, 39, and 29 times forward sales, respectively -- when a good price-to-sales ratio is generally considered to be between 1 and 2. Additionally, while Datadog and Zoom have recently made the jump to profitability, Fastly is still incurring losses.
Still, if the results so far this year are any indicator, each of these technology companies appears poised for success.