Technology stocks have been hammered in 2021, and some of the riskier (but higher-reward) stocks have been hit especially hard. If dealing with 50%-70% drawdowns is especially tricky, investing in some lower-risk stocks that still have high growth potential could be right for you.
The Trade Desk (TTD 3.97%) and Datadog (DDOG 1.89%) are both established companies and leaders in their space, making them safer bets. In 2021, both companies rose while many tech stocks were crushed. If you only have a limited amount of money and are looking to invest it, these two stocks would be great places to park that cash until your retirement. Here's why.
1. The Trade Desk
The Trade Desk has risen to prominence in the advertising technology space because of its software that allows advertisers to automatically bid on ad space. The company focuses on the "buy-side" of the adtech space -- it works with advertisers rather than publishers. With over $4.2 billion in ad spending running through its platform in 2020 and customers spread worldwide, The Trade Desk has become the leading software on the buy-side.
This leadership role is especially important because of the company's use of artificial intelligence (AI) and the industry's network effects. On every single transaction, along with every piece of information it receives from its leading cookieless advertising solution UID2, the company obtains data about customer engagement and advertising success. The company then uses artificial intelligence to analyze this data, making predictions about where companies should advertise in the future. As the company gets more data from its transaction volumes, its AI gets more accurate, making The Trade Desk's suggestions more valuable to advertisers.
As the leader, its AI has the most data and should be the most accurate, so maintaining this leadership role is critical. Additionally, if it maintains the best AI, it will attract more customers, which will continue to strengthen the AI and the value of its services.
The lucrative combination of these competitive advantages is why The Trade Desk can produce $300 million in revenue in one quarter while bringing almost 20% of that to the bottom line. As if that wasn't enough, the company has produced $167 million in free cash flow this year.
The company trades at a high valuation of 41 times sales, but with its dominance in the industry, its share price remains relatively stable. The company estimates that over $1 trillion will be spent on advertising in a few years, indicating that the opportunity for The Trade Desk is still wide open. Considering its competitive advantages, I would expect The Trade Desk to make the most of this opportunity.
Cloud-based enterprises have a lot going on for them operationally. Almost all companies have software and apps that they have to manage, and monitoring the customer experience has become crucial. The problem is that doing this can be extremely hard. While there are often specific tools for some applications, there hasn't been a singular observability platform that allows for monitoring and security on one easy-to-understand dashboard -- that is until Datadog created its platform.
With over 25 tools to help monitor and secure cloud platforms, Datadog is rapidly growing in a massive market -- one that is expected to be worth $53 billion by 2025. The company relies on its wide, optionable offering and its all-in-one platform to become the leading observability platform, and it has been wildly successful. The company was recognized as a leader in the performance monitoring industry by Gartner's Magic Quadrant, and with 75% top-line growth in its third quarter, I expect that this leadership will continue.
The company's real success has been through its effective land-and-expand approach. Datadog can get consumers to begin using one tool, but its simplicity and competitive advantages convince users to add on more tools and become bigger customers. In Q3, Datadog had 1,800 customers spending over $100,000, which grew 66% year over year.
The company is nearing break-even profitability, losing just $5 million in Q3. This is peanuts compared to its $270.5 million in revenue and its free cash flow generation of $57 million in Q3. However, this strong performance comes at a cost. The company is valued at 62 times sales, but its leadership, fast growth, and robust financials make this company worth paying up for.