Hot stocks cool down, and sector rotation hits even the best market darlings. Many names that hit fresh highs a few weeks ago are in the market doghouse right now, but quality will eventually win the day on Wall Street.

Datadog (NASDAQ:DDOG), DraftKings (NASDAQ:DKNG), and Fastly (NYSE:FSLY) are three stocks that have recently fallen at least 20% below their earlier highs. These are names that I expect will recover quickly. Here's why I'm bullish on these three briefly out-of-favor investments. 

A person celebrating the rising stock chart behind them.

Image source: Getty Images.


One of this year's bigger winners reported fresh financials this week, and Wall Street wasn't impressed. Shares of the cloud-based provider of website uptime tracking, security monitoring, and a growing suite of analytical tools declined 6% on Wednesday after posting its third-quarter results, and the stock is now 26% below the all-time high it hit just four weeks ago. 

The quarter had everything you would expect in an applause-worthy performance. The 61% increase in revenue and adjusted profit of $0.05 a share were comfortably ahead of the 50% top-line growth and $0.01 a share in net income that analysts targeted. Datadog boosted its outlook for all of 2020, and the guidance it initiated for the current quarter is also above where the pros are parked. 

Datadog's streak of dollar-based net retention rate above 130% (the rate of returning customers who are spending at least 30% more on Datadog's offerings than a year before) now stretches to 13 consecutive quarters. Bears can argue that Datadog's valuation was stretched when it peaked last month, but with revenue growth outpacing expectations, the bullish counter is that the multiple will keep retracting organically even as the stock bounces back in the near future. 


I have a love-hate relationship with DraftKings as an investment, but there's no denying that it's the top dog in wagering on fantasy sports. More importantly, DraftKings is using that pole position as a Trojan horse to get its more traditional sportsbook betting platform into our heads. DraftKings has been brokering deals with leading sports networks, and it's going to pay off a lot sooner than you think.

Investors were hopping onto DraftKings stock over the summer and early fall as pro sports leagues across the country restarted their seasons, but investors who once bet on DraftKings are now wagering against the niche leader. The stock has fallen 35% since its early October highs as of Wednesday's close, and it's well positioned to crank out a blowout quarterly report on Friday morning. Revenue rose 24% for the quarter that ended in June, and that was without any of the major leagues in action. This is a classic pullback that could bounce back later this week if it's able to deliver a strong financial update. 


The hardest-hit of the three stocks here is Fastly. The next-gen content delivery network ranked as one of this year's biggest winners until it lowered its guidance four weeks ago, largely as a result of losing Tiktok as its largest customer.

Investors bailed on Fastly, which lost nearly half of its value after declining in 12 of the last 13 trading days of October. Fastly is now trading 47% below the all-time high it established in mid-October. Whenever a company slashes its guidance, it's going to raise red flags. Datadog this week showed us that even increasing your guidance sometimes isn't good enough.

However, the end result here is that Fastly is now roughly half the company it was a month ago in terms of market valuation. Even if TikTok doesn't come back -- and it was a big part of the business, constituting nearly 11% of its revenue through the first nine months of 2020 -- analysts see revenue growing by at least 30% in 2021. 

Datadog, DraftKings, and Fastly are down -- but none of them is out.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.