The market has been especially volatile lately, as investors continue to process news about the presidential election, the pandemic, and the U.S. recession.
Technology stocks, in particular, have experienced some big price swings as investors consider whether or not parts of the U.S. will return to lockdowns this winter, or if Pfizer's vaccine candidate will be available to the general population later next year.
But despite all of the market uncertainty, there are a few software stocks that investors should consider buying now and holding onto for the longterm. We asked three Motley Fool contributors which software stocks they think investors should consider right now, and they came back with Twilio (NYSE:TWLO), DataDog (NASDAQ:DDOG), and HubSpot (NYSE:HUBS). Here's why.
Three signs this stock is a long-term winner
Brian Withers (Twilio): Twilio is getting caught up in the tech stock sell-off as investors may be cashing out to move to more conservative investments. This is a short-sighted approach and these sellers are going to miss out on the massive long-term prospects of this tech stock. With a pivot to become a customer engagement platform, the best days for the company are still ahead. Here are three recent events that show why.
The first event was the company's investor day presentation on Oct. 1, where management shared its long term vision and plans for the next few years. In short, the opportunity to grow is massive. Twilio has just a small portion of the potential market across all its product segments, its customer verticals, and in all regions around the globe. Given this huge opportunity, management committed that it would be able to achieve 30%-plus top-line annual growth for the next four years. This declaration should give investors confidence that the company plans to follow through on its growth plans and will be a much bigger platform in the years ahead.
The second event occurred on Oct. 12 when the company announced its $3.2 billion all-stock acquisition of Segment, a customer data platform company. This merger enables Twilio to tap into a deep set of customer insights to better inform its messaging applications, improve the platform's ability to engage with customers, and provide more personalized messages. Segment brings an additional $17 billion in addressable market opportunity. With the massive success Twilio's had in growing its customer base, this merger should help accelerate its top line even more.
The third event was its earnings release on Oct. 26. This report provided the cherry on top of what was an ice cream sundae of an October for the company. The 52% year-over-year growth beat management's increased guidance to hit a record $448 million in quarterly revenue. This incredible growth was driven by existing customers and new customer acquisitions. Existing customers drove its dollar-based net retention to 137% by expanding into new offerings and growing usage of their existing messaging products. The company added 8,000 customers in the quarter to hit a record 208,000, up 21% year over year. The company projected it would achieve 36% to 38% year-over-year top-line growth in the upcoming fourth quarter, but it's likely that it will beat those projections, too.
This customer engagement platform is on a roll. The investor day highlighted this growth company still has massive opportunities ahead. Its smart acquisition of Segment expanded its already huge addressable market even more. And its continued solid execution from its most recent earnings call makes this software platform a long-term buy. With the recent sell-off, now's a good chance to pick up some shares at a discount.
Datadog: Explosive growth at a discount
Danny Vena (Datadog): You've likely heard the old saying, "Don't throw out the baby with the bathwater." Given the wholesale sell-off within the technology sector over the past several weeks, the saying is particularly applicable to the current situation. The rotation out of tech and software stocks that began in mid-October has resulted in a number of bargains, presenting investors with a number of compelling opportunities. I think that's the case with Datadog.
The stock had been on a hot streak this year, boasting more than triple-digit gains between January and Oct. 13. Since then the stock has lost more than 25% of its value and nothing about Datadog's growth story has changed.
The results from earlier this week tell the tale. For the third quarter, DataDog reported revenue of $155 million, up 61% year over year, only a slight deceleration from the 68% top-line growth it delivered in the second quarter. The company also generated a small adjusted earnings per share (EPS) for the quarter of $0.05, not bad for a company that went public just over a year ago. Both metrics sailed past analysts' consensus estimates, which called for revenue of $144.3 million and EPS of $0.01.
The company also continued its strong track record of attracting new clients, with large, more lucrative enterprise businesses at the top of the list. Customers representing annual revenue of more than $100,000 grew to 1,107, growing 52% from 727 in the prior-year quarter. At the same time, its overall client base climbed to 13,100, up 38%.
Another secret to Datadog's success is that once customers try out its services, they not only tend to stick around, but also spend more money. The company reported a dollar-based retention rate -- which measures the level of spending by existing customers -- of above 130% for the 13th consecutive quarter. Put another way, existing clients spent 30% more over the past year than they did in the preceding 12 months.
Datadog's lofty valuation probably contributed to its decline. Even after its recent haircut, the stock trades for roughly 52 times trailing-12-month sales.
That said, given Datadog's high-caliber growth, I'd argue it's worth its premium price tag and it's just taking a breather before climbing to even loftier heights. The stock might be worth a look at its recent discounted price.
HubSpot's fantastic year isn't over yet
Chris Neiger (HubSpot): HubSpot's software may not be well known to the average investor, but it's playing a critical role for small businesses, especially during the pandemic. HubSpot's inbound marketing software helps companies manage their current customer relationships while also providing online tools to acquire new ones.
With HubSpot focusing on small and medium-sized businesses, you might assume that the company has taken a hit this year as many small businesses have suffered from the negative economic effects of COVID-19. But HubSpot has proved to be very resilient and in the third quarter (reported on Nov. 5) HubSpot's sales spike 32% and adjusted diluted earnings per share reached $0.28, both of which outpaced the company's own guidance and beat Wall Street's expectations.
Even during this tough economic time, HubSpot grew its subscription revenue by 32% in the third quarter and boosted its total customers by an impressive 39% year over year. Part of the company's success this year came from its ability to work with businesses that were struggling, offering them free premium services or reduced rates in order to help them out. That type of strategy may seem counter intuitive for some businesses, but it's helped HubSpot build a large customer base that will likely be loyal to the company for years to come.
Even with the difficult economic situation, HubSpot's management said full-year 2020 revenue will be 28% higher than it was last year. Investors have taken notice of HubSpot's phenomenal growth this year and have pushed the company's share price up an impressive 122% year to date.
And while it may seem logical to think that there's no more room for current investors to benefit, consider that HubSpot's massive customer growth this year will likely boost sales and earnings down the line. When the pandemic is behind us and companies begin spending more money to grow their businesses, they'll likely do so using many of HubSpot's services that helped them get through this difficult year.