Software developers are becoming a key resource for companies as they move to update manual outdated processes to more efficient digital workflows. These software professionals depend on tools from companies like Atlassian (TEAM 1.07%), Twilio (TWLO 0.25%), and MongoDB (MDB 0.15%) to enable this transformation. For investors, this trio is a great "picks and shovels" play for the digital transformation gold rush.
Let's take a closer look at why you should consider adding these top tech stocks to your portfolio right now.
1. Atlassian: Building tools for teams
Atlassian's mission is to "unleash the potential in every team." To do that, it has built an ecosystem of integrated applications that help teams plan, collaborate, build software, and support products once they are released. The tools are great for developers, but also easy enough to use that all team members can use them too. In fact, users of its top-selling Jira and Confluence tools are almost split 50/50 between technical and non-technical team members.
Image source: Getty Images.
The company uses this comprehensive toolset and free trials of its cloud software to grow using a "land and expand" strategy. With its highly effective self-service website, marketing and sales expenses have been kept at a low 15% of revenue. This enables it to invest even more to improve its products, and last quarter it spent more than 50% of its revenue on research and development.
As a result, software developers and their teams love these tools. Last quarter, overall customers grew 14% year over year. But existing customers are also spending more, which powered overall revenue to a 26% year-over-year gain. It may face some short-term headwinds as it executes a major transition to move all its customers to cloud-based products. But after the transition is complete, the company and its products will emerge even stronger. This is a great time for investors to get on board with this team.
2. Twilio: Powering customer engagement
Whether it's an order status email, an appointment reminder call, or a text indicating your food delivery is on the way, Twilio is the engine behind many of the software-driven digital communications you receive today. Within a couple of hours, a developer can download a free trial and be generating value-added customer messages with data from a company's legacy applications. This developer-focused approach has been a powerful growth engine for Twilio.
In its most recent quarter, the company posted stellar 52% year-over-year top-line growth. This growth was driven by a 21% increase in customers since the last third quarter and a solid 137% dollar-based net expansion rate. Management expects to hit at least 30% year-over-year top-line growth for the next four years, and that doesn't even include benefits from its most recent acquisition of Segment, the customer data platform.
Twilio expects to end the year on a high note, with its fourth-quarter quarterly revenue growth targeted at least 36% year over year. With numerous ways to grow, I think the market is discounting the long-term potential of this customer engagement platform. Now would be a good time to buy this growth stock before the market realizes its mistake.
3. MongoDB: Making cloud applications run better
MongoDB is a cloud-optimized database built by software developers for developers. As a result, it's the most popular modern database as ranked by DB-engines. Customers are just beginning to move their legacy applications to the cloud, and MongoDB is well suited to be the foundation for the next wave of enterprise applications.
MongoDB has both an on-premise and a cloud-based version of its product for customers. Its cloud product, Atlas, is growing faster because it's easier for developers to get started. Last quarter it grew its topline 38% year over year, but Atlas grew at a torrid 61%. This cloud-based product now accounts for 47% of the total revenue. With customers adopting this cloud version, it gets a view into how developers use the database, which enables it to focus its upgrade efforts on what customers need most.
Large organizations don't make upgrades to their enterprise software very often. When they do, they'll be looking to the cloud as a way to modernize their applications. This makes MongoDB's growth runway a long one. As the platform continues to attract customers, it will allow the company to invest more in its product, and the offering will just get better over time. A better product should attract even more customers. For investors, this is a great formula for long-term growth. With a solid Q3 earnings beat in the books, now would be a good time to put this cloud database specialist in your portfolio.
The bottom line for investors
These three growth stocks have had a tremendous run this year. All three gained more than 80% since Jan. 1.
Year-to-date stock prices through Dec. 10, 2020. TWLO data by YCharts.
These solid gains have also put these stocks' price-to-sales ratios up into the 30-plus range. This represents a significant multiple to the S&P 500's average of 2.7, and may scare away more conservative investors. For me, it's a recognition of the quality of these companies and their long-term potential.
I don't expect these stocks to put up this kind of incredible growth in 2021. But software will continue to be an important part of many companies' long-term strategies, and these developer-loved tech platforms should continue to deliver market-beating returns in the years ahead.
