The rate at which data is being produced in the world is staggering. Over the past two years, 90% of the world's data has been produced, and by 2025, the annual amount of data created, captured, copied, and consumed worldwide is expected to more than double from today, according to Statista. With this much data creation in the world, many businesses have been built to help store, monitor, and analyze the massive influx.
As an investor, I look for industries that are expected to grow rapidly over the next decade or more. Companies built on managing data seem to fit that definition. Three companies in particular that work with data could give investors incredible returns over the long term. Here's why Snowflake (SNOW -1.99%), Confluent (CFLT -1.90%), and Datadog (DDOG -3.94%) are all growing tech stocks worth buying and holding for the next two decades.
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1. Snowflake
Businesses receive data from almost every part of their business. With an increasing cloud-based presence, the amount of data being produced from software and other sources will keep increasing, and companies will want to look at and analyze this data at some point. However, not all data being produced today will be valuable to companies when initially created. Companies will want to store this data for later use, and Snowflake helps them to do this.
Snowflake is a data warehouse that allows businesses to store their data so they can analyze it in the future. The company makes it free to store data and only charges companies when they want to query and look at it. Snowflake customers find it easy to join, but hard to leave.
Revenue in the third quarter of fiscal 2022 (ending Oct. 31. 2021) hit $334 million, growing 110% year over year. With businesses receiving more data every day, it will result in more analysis, more queries, and more revenue in the future. The company already receives roughly 1.3 million queries each day, but with more data to analyze in the future, companies will likely end up paying more often. This can already be seen in Snowflake's net retention rate, which is 173%.
At 86 times sales, this company is by no means cheap. The stock price could drop 50% to 43 times sales and still be considered expensive, so potential investors should expect some volatility over the next few years. However, its business model allows for incredible usage-based growth over the next few decades, and as businesses obtain more data and seek to analyze it more, Snowflake could reap incredible benefits. Almost half of the Fortune 500 are customers, so Snowflake has become a big name in the data storage space, and I think the company could use that to its advantage to grow rapidly over the next 20 years.
2. Confluent
Even if they send all of their data to Snowflake, many businesses also need to analyze data in real-time. For instance, if you're a bank moving data around, you would want to know about fraud immediately rather than the next morning, and Confluent helps in that process. It integrates data from multiple sources into one data stream where it utilizes some open-source software called Apache Kafka to analyze the data in real-time.
Apache Kafka is an incredibly valuable analysis system that 80% of the Fortune 100 use for some part of their business, but it is incredibly complex to scale and integrate into an entire business. Confluent acts as an expert source, integrating Kafka into an entire enterprise and handling the complex parts that in-house staff aren't able to manage. Considering the value of Kafka, Confluent has seen major adoption from large enterprises: 664 customers spend over $100,000 with Confluent, which helped revenue grow 67% year over year to $103 million in the third quarter of fiscal 2021 (ending Sept. 30).
Confluent is the leading managed Kafka platform today, and that is likely helped by the people running the company. The developers of Kafka are also the founders of Confluent, so nobody knows the ins and outs of Apache Kafka like Confluent's founders. This gives them an unparalleled advantage over other managed Kafka services. As a result of this intangible advantage, the company has a high valuation of 41 times sales -- very high, just like Snowflake. However, with an addressable market that is expected to nearly double to $91 billion by 2024, I think Confluent is worth the premium valuation.
3. Datadog
If a company wants to obtain all of this data and analyze it in real-time, it needs to monitor its software to ensure it is operational and performing well. Companies need to ensure that their infrastructure, applications, and other systems are working properly and securely, and Datadog is the leading platform to help businesses do so.
Datadog has dozens of software tools and integrations that make it the one-stop shop for everything a business may need to monitor and optimize its cloud presence, and this major product optionality has allowed the business to grow immensely. In the company's fiscal 2021 third-quarter earnings (ended Sept. 30), management reported that 31% of its customers are using four or more of its software products or services, which was up from 20% in the year-ago quarter. This shows Datadog's success in its land-and-expand marketing strategy, and with the addition of 10 new products and integrations at its latest user conference, this strategy could continue growing.
All three companies featured here are operating at a loss today, but that is because all three businesses are investing heavily to grow their businesses and eventually reap the benefits of the major growth in data and their respective industries over the next decade. Datadog, for instance, posted a $5.5 million loss in Q3. The loss is improving year over year as Datadog has become the far-and-away leader in the space, and this leadership and unrivaled product offering are the things that could allow this business to continue its rapid growth for years to come.
