Rising bond yields have sparked a rotation from growth to value stocks over the past two months. As a result, many tech stocks that dazzled growth-oriented investors throughout the pandemic stumbled as the market reassessed their high valuations.
It's prudent to take profits in some stocks that are pricing in too many years of unfettered growth, but it's also foolish to abandon disruptive tech companies that can still profit from long-term secular trends.
Let's examine three tech stocks that saw their prices pulled back over the past two months but could still be worth holding for years: Twilio (NYSE:TWLO), Datadog (NASDAQ:DDOG), and Palantir (NYSE:PLTR).
Twilio's cloud-based platform handles phone calls, text messages, and videos for mobile apps. Developers previously created those features from scratch, which was buggy, time-consuming, and tough to scale.
Twilio's service lets developers outsource those features to its cloud platform with a few lines of code. For example, Lyft routes calls and messages between riders and drivers through Twilio, while Airbnb uses Twilio to connect guests with hosts.
Twilio's revenue rose 55% to $1.76 billion in fiscal 2020. It ended the year with a dollar-based net expansion rate of 137%, which means its existing customers spent 37% more on its services this year than the prior year. It ended the year with over 221,000 active customer accounts, up from about 179,000 a year earlier.
Twilio's adjusted net income rose 62% to $35.9 million as its adjusted EPS rose 44%. Wall Street expects its revenue to rise 38% this year, but for its adjusted earnings to dip into the red again as higher investments and new carrier fees for accessing SMS networks squeeze its margins.
Those near-term challenges are sparking some concerns about Twilio's future, and the stock still looks expensive at 20 times next year's sales. However, Twilio's first-mover's advantage in its niche market, its high net expansion rates, and an expanding mobile market should all propel its stock higher over the next few years.
Datadog's platform enables IT professionals to monitor the performance of an organization's software and services on unified dashboards. In the past, IT professionals often monitored those applications separately across different hardware and software platforms, which was tedious and prone to mistakes.
More than 400 software platforms, including Amazon Web Services and Microsoft Azure, now offer native support for Datadog's services.
Datadog's revenue rose 66% to $603.5 million in fiscal 2020. Its net retention rate, which is roughly comparable to Twilio's net expansion rate, has remained above 130% for 14 straight quarters.
The stickiness of Datadog's dashboards is reflected in its other growth metrics. At the end of 2020, 22% of its customers were using four or more of its services, up from just 10% a year earlier.
Its number of customers generating more than $100,000 in annual recurring revenue (ARR) rose 46% to 1,253 in 2020. Within that total, its number of customers generating over $1 million in ARR grew 94% to 50.
Datadog generated an adjusted net profit of $71.6 million, or $0.22 per share, for the full year, compared to a net loss of $471,000 in 2019. It expects its revenue to rise 37%-39% in fiscal 2021, but for its adjusted earnings to dip 36%-55% as it integrates two recent acquisitions and ramps up its investments again.
Datadog's stock also isn't cheap at 25 times next year's sales, but its silo-busting technology arguably justifies that higher price-to-sales ratio.
Palantir's platform, which is named after the all-seeing orbs from The Lord of the Rings, accumulates data from disparate sources and helps organizations make data-driven decisions. It generates over half of its revenue from government contracts and plans to become the "default operating system" of the U.S. government for handling data.
Palantir's software is controversial. It was reportedly used to hunt Osama Bin Laden in 2011, but it has also been used by Immigration and Customs Enforcement (ICE) to locate and deport undocumented immigrants. Nonetheless, it continues to win new government contracts as its enterprise-facing Foundry business expands.
Palantir's revenue rose 47% to $1.1 billion in fiscal 2020. Its average revenue per customer increased 41% to $7.9 million, while the average revenue of its top 20 customers jumped 34% to $33.2 million.
Its total number of customers generating more than $5 million in annual revenue rose 54%, while its number of customers generating over $10 million in annual revenue increased 50%.
Palantir's net loss widened from $580 million to $1.17 billion, mainly due to stock-based compensation expenses and the costs of its direct listing last September, but its adjusted gross and operating margins expanded.
Palantir expects its revenue to rise at least 30% in fiscal 2021, but it will likely remain unprofitable. Its stock looks pricey at 23 times next year's sales, but it remains a favorite stock of both Cathie Wood and Robinhood investors, and its long-term growth potential is tough to ignore.