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3 Tech Stocks to Buy in the New Year

By Brian Withers - Updated Feb 15, 2021 at 9:08AM

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The forecast? Cloudy with a chance of massive returns.

The coronavirus has prompted many companies to accelerate their digital transformation plans. As these businesses look to new digital tools, they are increasingly adopting cloud-based software. With a mix of legacy applications and a growing set of new cloud products, companies are turning to Twilio (TWLO 2.04%), Cloudflare (NET -1.90%), and Datadog (DDOG -2.20%) to make the most of their digital infrastructure. Let's find out why investors should consider upgrading their status to shareholder for this trio in the new year.

Twilio: Bringing customer engagement into the cloud era

We have all gotten used to status messages on our mobile devices for the services we use. It could be an update that your driver will be a few minutes late, notification that your pizza is on the way, or a reminder of your upcoming medical appointment. Twilio is the software that makes these messages possible, and its developer-friendly platform is only just getting started.

Since its founding in 2008, it has grown to be a $1.5 billion annual revenue business that's still posting torrid growth. Last quarter, customers grew 21% year over year to 208,000, and revenue grew by 52% to $447 million. Its customers are spending more every year, as its enviable dollar-based net expansion rate of 137% shows. Even though it's losing money, the $3.3 billion in cash and marketable securities on its balance sheet will allow it to continue to invest in growth for years.

As the company goes after its $79 billion addressable market, this platform-as-a-service player's best days are still ahead. Maybe you should consider adding this gem to your portfolio.

Person holding mobile device overlaid with an image of a cloud.

Image source: Getty Images.

Cloudflare: An internet "fast pass"

Cloudflare's mission is to "build a better internet." What that means for its customers is that they can achieve better application performance, improved security, and high reliability for the ever-increasing demands of users. High-tech companies like Hubspot, Shopify, and Zendesk all use Cloudflare to power their cloud applications to ensure customers have services that are always on, with lightning-fast response times. 

Its business model and innovative technology have rocketed this infrastructure-as-a-service company to an expected $423 million in revenue for 2020. This represents an amazing 47% year-over-year gain. But what's even more exciting is that its 100,000-plus customers end up spending more every year. In fact, its dollar-based net expansion rate has been at or above 115% over the last 10 quarters. Like Twilio, the company is losing money, but the $26 million loss last quarter is a small fraction of the $1.05 billion in cash and marketable securities on its balance sheet.

It has a massive opportunity of $32 billion with its estimated addressable market, growing to $47 billion by 2022. With Cloudflare's superior platform, its sticky ecosystem, and a quality founder-led management team, this business is well-positioned to continue to win in the years ahead. It might be just the stock for you in the new year.

Datadog: Making your cloud network easier to manage

Datadog came public at $27 in September 2019, and its stock has rocketed up four-fold since then. Investors may be worried that they've missed the boat, but this (Data)dog still has plenty of room to run. This application performance monitoring (APM) specialist helps information technology teams watch and manage the performance of their ever-growing environment of cloud apps, internet security measures, and infrastructure all from one screen. The days of companies using APM tools is just beginning. Gartner estimates that as of 2018, only 5% of all applications were being monitored, and this will only grow as cloud applications become more prevalent.

Datadog's innovative streak and sticky ecosystem have captured more than 1,100 customers paying over $100,000 in subscription fees annually, up 52% from a year ago. Total revenue for its most recent quarter grew 61% to $155 million and posted strong cash flow from operations at $36 million. Its dollar-based net retention rates are enviable at over 130%. Like its cloud brothers mentioned above, it's losing money too. But with $1.5 billion in cash and marketable securities on the balance sheet, it's not going broke anytime soon.

Interested investors should watch to see if the company will hit its targeted fourth-quarter revenue of $162 million to $164 million when it announces earnings on Feb. 11. With a history of earnings beats, I would not be surprised if the company trumps its targeted 43% revenue year-over-year growth on its way to taking more of its huge $35 billion addressable market. 

You should consider bringing this dog's stock home to roost in your portfolio.

The bottom line for investors

This trio of high-growth software stocks is not cheap by any measure. Since the companies lack earnings, the price-to-sales ratios give readers an idea of the premium the market is putting on their valuations. Twilio looks like a value play with its price-to-sales ratio at "only" 36, compared to the other duo in the low 60s. Investors interested in these stocks should buy in over time and plan to hold for the long term. As companies move to the cloud over the next several decades, these three stocks should make patient shareholders very happy.

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Stocks Mentioned

Twilio Inc. Stock Quote
Twilio Inc.
TWLO
$101.71 (2.04%) $2.03
Zendesk, Inc. Stock Quote
Zendesk, Inc.
ZEN
$100.19 (1.57%) $1.55
HubSpot Stock Quote
HubSpot
HUBS
$337.28 (0.18%) $0.60
Shopify Inc. Stock Quote
Shopify Inc.
SHOP
$372.64 (3.52%) $12.69
Cloudflare, Inc. Stock Quote
Cloudflare, Inc.
NET
$56.27 (-1.90%) $-1.09
Datadog, Inc. Stock Quote
Datadog, Inc.
DDOG
$95.05 (-2.20%) $-2.14

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

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